Euro: Limited gains from ECB tightening – Commerzbank

Commerzbank’s Thu Lan Nguyen argues that EUR/USD remains primarily driven by the US Dollar, with Euro-side developments only amplifying or dampening trends. The Euro has gained little from past and expected ECB rate hikes, as markets see them as necessary to correct an overly low policy rate and preserve the Euro’s value rather than materially boost it.

ECB hikes seen as value preservation

"And what about the other major event this week, the ECB meeting? As we have argued on several occasions, the euro side has played only a limited role, at least in EUR/USD."

"The action is clearly on the US dollar side, meaning that it is the greenback that continues to dictate the direction of the exchange rate. Developments on the euro side have recently been able to amplify or dampen the trend, but not reverse it."

"One could easily explain this by pointing out that the US dollar is the world's dominant reserve currency and therefore naturally attracts larger and more influential capital flows."

"However, the fact that the euro has benefited only modestly from both the ECB's previous rate hike and the further tightening expected this week may also reflect another factor: the market appears to view these rate increases as more necessary than those priced in in the US."

"In other words, investors seem to believe that the ECB's previous policy rate was too low. As a result, the ECB's monetary tightening is seen primarily as a measure to preserve the euro's value rather than to significantly increase it."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)