Euro to US Dollar Could Remain in the Range as ECB Likely to Back-Track on Promise to Ease
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With the impact of Brexit on the Eurozone seemingly minimal at the moment, there seems less and less chance the ECB will start to reflate the economy in September, at least according to Credit Agricole’s stable of analysts.
Whilst the UK economy’s rather jammy reaction to the supposed catastrophe that was expected after Brexit may not be making it many friends on the continent, (from an already dwindling pool of candidates), and will almost certainly be getting up Gallic noses in particular, a deeper crisis, both in the UK and Europe has clearly been averted.
Draghi’s prognosis of a 0.3-0.5% break on growth now seems rather excessive in light of recent data, and although there are those who argue the fallout from Brexit may be a slow-burn affair with a negative impact on longer-term growth, those at Credit Agricole in the short-term see a much lower chance the ECB will ramp up stimulus efforts in September to break the fall.
“The EUR has been well supported of late. This appears to be on the back of stable ECB rate expectations and reduced sensitivity to risk sentiment. Regardless of inflation expectations as measured by 5Y inflation swaps being close to historic lows, we see limited scope for the ECB to consider a more dovish monetary policy stance any time soon. This is especially true when it comes to interest rates.” Said the French lender in a recent note.
As such, the result of the euro’s key data release in the week ahead – flash Inflation in August- may not be as significant in gauging expectations of whether the ECB will change its policy stance in September.
Nordea Bank’s Bo Jakobsen expects an uptick:
“The main data point is the flash inflation reading for August on Wednesday. We expect an unchanged core rate and a small uptick in headline inflation (to 0.3% y/y), driven by energy prices. The risks to our call are balanced. Unemployment should continue on its downward trend (Wed). These data are among the last to be published ahead of the next ECB meeting on 8 September.”
A steady inflation reading combined with a changing global risk outlook, which may be about to take a hit from falling commodity prices, and the Eurozone’s continued current account surplus, means downside may be limited for the euro.
The dollar, however, may experience more upside if data in the week ahead supports a firming up of rate hike expectations.
This will be especially true if Non-Farm Payrolls beat expectations, however, given the data is for August, and the holiday season, this is by no means an expectation, and most analysts if anything, seem to be forecasting a slight slowdown after June and July’s figures knocked it out of the park.
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