Euro: ECB tightening seen limiting downside – BBH

Brown Brothers Harriman's Elias Haddad notes EUR/USD is trading just under 1.1600 as Eurozone August CPI revealed easing inflation, with core and services measures decelerating. Despite this, the Eurozone's inflation remains above target and the economy continues to grow, allowing the European Central Bank (ECB) to raise rates. Markets are nearly fully pricing a 25 basis point increase to 2.50% on September 10 and a total of 75 basis points over the next year, making further declines below 1.1400 improbable.

EUR/USD is trading just below 1.1600, with Eurozone August CPI aligning with expectations at 3.3% y/y, while core inflation fell short at 2.4% y/y. The swaps curve reflects virtually full pricing in a 25bps ECB rate hike to 2.50% on September 10 and a cumulative 75bps tightening over the following year. Above-target Eurozone inflation and a robust growth outlook grant the ECB the flexibility to increase rates, making low EUR/USD levels below 1.1400 unlikely.