Euro: ECB hikes seen as growth headwind – BBH
Brown Brothers Harriman’s Elias Haddad (BBH) anticipates the European Central Bank (ECB) will end its pause with a 25 bps hike to 2.25% as core and services inflation run above forecasts. However, weaker Eurozone growth prospects and likely downgraded projections lead the bank to expect EUR/USD to decline, even as ECB tightening helps limit downside in a stagflationary backdrop.
ECB tightening into weakening Eurozone growth
"On Thursday, the ECB is set to end a seven meeting pause with a 25bps policy rate hike to 2.25% to curb rising inflation pressures."
"In May, Eurozone core CPI rose to a 13-month high at 2.5% y/y, tracking closer to the ECB’s Q2 severe scenario (2.4%) than to its baseline forecast (2.2%) and adverse scenario (2.3%). Moreover, services CPI surged to a seven-month high at 3.5% y/y, raising the risk of a persistent pickup in inflation."
"The ECB will also publish its June macroeconomic projections which will likely show a downgrade to its growth forecast."
"PMI data indicate Eurozone real GDP could contract by -0.2% q/q in Q2, a pace that sits between the ECB’s adverse (-0.1%) and severe (-0.3%) scenarios and below its current baseline forecast of +0.1%."
"We expect EUR/USD to fall to 1.1400, reflecting a stronger US growth outlook relative to the Eurozone. ECB rate hikes in a sluggish growth, high inflation environment, is not bullish for EUR but should help cushion the downside."
(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)