The EUR has weakened sharply across the board in the aftermath of the ECB’s June policy decision.
Key Quotes:
“With a decline of 1.3% against the USD so far, the EUR has under-performed all but a handful of other major currencies today.
While we think markets may have overreacted somewhat to this week’s developments, the combination of Wednesday’s FOMC rate hike and today’s ECB policy declarations have weighed significantly on the EUR’s near-term outlook.”
“Interestingly, this has come largely through both central banks delivering mostly as expected – at least as far as the policy endpoints were concerned. The Fed added another ‘dot’ to the 2018 outlook, but its longer-term forecasts remained unchanged. Their endpoint was the same, but they suggested they may get there a little faster than previously. The ECB, for its part, also kept their endpoint of a September 2019 rate hike the same. In their case, however, they suggested progress may be a bit slower. In absolute terms, these are not large changes. On a relative basis, it keeps alive the notion of policy divergence a bit longer.
We do not want to get carried away, however. While we have received clarity on the policy intent from both the Fed and ECB, it is crucial to remember that we live in volatile and uncertain times. Markets may need to re-price to these intentions to some extent, but we think overshoots will be punished – in either direction.”
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