EUR/USD continues higher increasing the pressure on the ECB – Danske Bank

The main focus at the ECB meeting is likely to be how big a problem the current pace of euro appreciation is for the ECB, according to Pernille Bomholdt Henneberg, Chief Analyst at Danske Bank.

Key Quotes

“We expect Draghi to express concern about this and explicitly mention that the stronger euro is the main reason the ECB has lowered its inflation projection for the longer horizon. The downward revision should be important for the ECB, signalling announcement of a QE continuation in October.”

“The strengthening of the euro was already a topic at the ECB meeting in July, when EUR/USD had not yet crossed 1.16and the effective euro was 2% weaker than its current level. The minutes from the July meeting revealed that ‘concerns were expressed about a possible overshooting in the repricing by financial markets, notably the foreign exchange market’.”

“Although the stronger euro will be a considerable headwind to the outlook for inflation, we believe Draghi is still likely to express some hawkishness as the growth momentum is still strong. He has previously used this as an argument for why he expects inflation to rise eventually.”

“The 4% stronger effective euro since the latest ECB forecast update should drag down headline inflation by an accumulated 0.3pp after two years according to the OECD’s new global model.”