In the short-term, we think EUR has a bit more room to run. The hawkish surprise is something that took many participants (us included) by surprise – and the repricing could provide some additional support for the single currency.
Going into Thursday’s ECB meeting, the majority of participants were expecting a pretty boring affair, with the bar for a hawkish pivot extremely high. However, President Lagarde released her inner hawk – and EUR bulls paid the price for it.
Even though Core inflation in the EU is just 0.3% above target, the big surprise in headline HICP got the attention of the governing council with President Lagarde – noting the recent inflation data saw unanimous concern.
With markets now pricing in over 50bsp of tightening for the ECB by the end of the year, and the chances of a March recalibration of policy growing, that should provide a favourable environment for the EUR in the short-term.
As always, we have more on this and how we look to potentially take advantage of it in our week ahead video.