Euro: ECB pause seen limiting downside against US Dollar – BBH

Brown Brothers Harriman’s (BBH) Elias Haddad expects the ECB to leave rates at 2.25% after June’s 25 bps hike, maintaining a data-dependent stance without new projections. Markets fully price a September hike and over 50 bps of tightening in twelve months, but the Haddad argues tighter policy with the Eurozone below potential is more likely to cap Euro downside than drive significant appreciation.

ECB on hold with hawkish pricing

"The ECB policy decision is Thursday. The ECB is widely expected to leave the policy rate unchanged at 2.25% after delivering a well-telegraphed 25bps hike in June. Eurozone CPI indicators are tracking slightly below the ECB’s baseline forecast while the rebound in energy prices are still traling the ECB’s base case assumption."

"The ECB is also poised to stick to its data-dependent, meeting-by-meeting approach without pre-committing to any particular rate path. There are no updated macroeconomic projections associated with this meeting."

"The swaps curve fully price in a 25bps hike in September and more than 50bps of tightening over the next twelve months to 2.75%. That would leave the policy rate near the top of the ECB’s estimated neutral range (1.75%-3.00%)."

"However, tighter monetary policy when the Eurozone economy is still operating below potential is more likely to limit EUR downside than push the currency higher because it raises the likelihood of a downward adjustment to ECB rate expectations."