Euro: Hawkish ECB tone could limit downside against US Dollar – Commerzbank

Commerzbank’s Thu Lan Nguyen expects EUR/USD to see limited drivers from United States (US) data or Federal Reserve (Fed) communication this week, putting focus on the European Central Bank (ECB). With markets already pricing a September hike, she argues that how hawkish the ECB sounds on inflation and future tightening will be key for Euro performance and downside risks in EUR/USD.

ECB communication to shape Euro risks

"This week promises to be a quiet one for the EUR-USD exchange rate. As we have discussed here many times before, US monetary policy is currently the key driver of the currency pair. However, on the one hand, Federal Reserve officials do not comment publicly on the monetary policy outlook in the week before the Fed meeting."

"This is particularly the case if there is still no sign of the Strait of Hormuz being reopened and a further increase in energy prices is therefore looming. One thing should be clear: as long as the conflict continues, the data from recent months carry less weight."

"However, for the euro exchange rate over the coming weeks, it could indeed be crucial how hawkish the ECB presents itself. The more strongly it already now warns of inflation risks in light of a renewed escalation in the Middle East conflict, the more confident the market is likely to be not only about a rate move in September, but there is a high likelihood that it will tend to price in additional rate hikes."

"For the market, it is therefore crucial how clearly the ECB underscores that it is prepared to raise its key rate beyond September. This is likely to be decisive in limiting the downside potential in EUR-USD in the event of a further escalation in the US-Iran conflict."