Euro: Real rate headwinds and fragile demand – BNY

BNY’s Geoff Yu argues that despite aggressive ECB pricing, the Euro is failing to benefit as real rate dynamics and growth concerns weigh on EUR/USD. He notes that tighter policy could quickly morph into expectations of forward easing, with Bund yields capped and Eurozone services PMIs signaling demand weakness. The analysis questions whether ECB hawkishness can sustainably support the Euro.

ECB pricing fails to lift euro

"Current pricing for the ECB remains well ahead of the Fed and peers, but the EUR is struggling to benefit."

"Firstly, if the net cost to Eurozone growth from a hike proves stronger than anticipated, the market will price in forward easing swiftly, with some dampening in risk-free yields such as Bunds."

"Breakeven inflation, as seen in the U.S., may not have increased markedly, but the lack of further gains in Bund yields due to growth concerns will undermine performance, in the same way that the drop in equity holdings is already impacting the euro through asset rotation."

"We continue to question the view that ECB hawkishness will benefit the euro."

"On the margins, some increased hedging may be necessary, but iFlow figures indicate the EUR is now losing ground in holdings across the board, largely driven by domestic investors adding hedges on overseas investments, especially in the Eurozone."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)