EUR: Don't look at the eurozone, look at the US
We have published the ECB Cheat Sheet ahead of Thursday’s policy announcement in Frankfurt. A 25bp outcome has already been priced in by markets and looks like a done deal based on recent ECB communication, so the focus will be on the commitment to future tightening. Arguably, the grounds to retain a hawkish stance have become scarcer since the softening of the inflation and growth story in the eurozone, and the chances of a hawkish surprise have therefore decreased.
From an FX perspective, we do not see the ECB risk event this week as big as anything happening in the US. The recent EUR/USD decline was caused by a deterioration in the EUR-USD short-term rate differential, but that was overwhelmingly driven by a jump in the more volatile USD rates while EUR rates remained stable. US CPI numbers and the Fed decisions are what will matter the most for EUR/USD this week, and more generally, US data and the Fed’s future path are what will primarily determine the direction of EUR/USD moving ahead.
If we are right about a 0.4% core US CPI print today, there may be some moderate upside risks for EUR/USD, should investors see that as enough to price out the remaining 23% implied probability of a hike tomorrow. But we are not convinced of that and some cautious trading ahead of key central bank risk events may keep the pair capped.
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