Euro: ECB hike view supports range against US Dollar - Danske Bank
Danske Research Team notes that EUR/USD remains steady near 1.1650 as markets reassess the ECB outlook.
The euro remains stable near 1.1650 against the US Dollar as markets evaluate the European Central Bank's (ECB) outlook. August inflation data is anticipated to reveal higher headline inflation, but subdued underlying price pressures. This supports the view of a final 25 basis point (bp) ECB interest rate increase in September, followed by a prolonged pause, with the deposit rate expected to stay at 2.50% until 2027.
Euro area inflation is forecasted to increase to 3.4% year-over-year (y/y) from 3.0% y/y, while core inflation is predicted to remain steady at 2.5% y/y, primarily due to rising energy prices, with gasoline up 5% month-over-month (m/m) and diesel up 8% m/m. The PMI price components hint at limited momentum in core inflation. The European Commission's business survey for the euro area, released in August, will focus on firms' expected price changes, with recent declines in selling prices expectations after previous rises in March and April.
As services expectations return to pre-war levels, the probability of further 25bp ECB rate hikes should diminish. The July ECB minutes indicate a September rate hike as the default scenario unless inflation projections improve substantially, but no precise guidance is provided beyond that. The relatively stable underlying inflation scenario, with energy-driven price pressures and scant evidence of demand pressures or secondary effects, keeps the ECB on standby mode following the September hike.
EUR rates have remained relatively unchanged since the release, as a September rate hike is already factored in. An additional ECB meeting is set, maintaining the expectation of a final rate increase in September but no longer anticipating rate cuts in the following year, which means the deposit rate will continue to be 2.50% throughout 2027.
In the United States, the Federal Reserve's annual Jackson Hole conference is ongoing. The main market impact from the event will be Chairman Jerome Powell's speech on monetary policy expectations for September. Markets will closely watch Powell's remarks for any indications of policy shifts in September. Expectations suggest that Powell will offer minimal forward guidance during his address.
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