Euro: Firms against US Dollar as ECB hike in focus – Danske Bank

Danske Research Team expects the European Central Bank (ECB) to raise its deposit rate by 25bp to 2.50%, in line with consensus and market pricing, while President Lagarde is expected to retain full optionality on future moves. They note that EUR/USD edged slightly higher alongside longer US Treasury yields after the Treasury announced a USD 6bn long-end bond buyback operation, with markets also looking ahead to US Producer Price Index (PPI) data.

ECB hike and Euro reaction focus

"In the euro area, the ECB will announce its deposit rate. We expect the ECB to raise policy rates by 25bp, bringing the deposit rate to 2.50%, in line with consensus and market pricing. We expect Lagarde to retain full optionality over the future rate path and provide no firm guidance, which should limit the market reaction."

"Yields rose yesterday as energy prices pushed higher, with EUR swaps rising around 8bp higher in the 2Y to 10Y segments of the curve. The US announcement of the size of the buyback announcement was slightly less than market anticipated, and we saw the EUR/USD edge slightly higher in tandem with longer Treasury yields. Today, focus turns to the ECB meeting, where a hike is widely expected."

"In the US, the Treasury announced that today's first expanded long-end bond buyback operation will be up to USD 6bn. This is probably close to the bare minimum needed after the August guidance pointed to more than a doubling of the previous USD 2bn amount, and some investors had seemingly hoped for a larger first step. The announcement applies to today's operation only and does not set the size for later ones. Long-end US Treasury yields rose following the announcement, although the move was contained."

"In the US, August PPI is due for release. In recent months, y/y growth in both headline and core PPI has trended down. Headline PPI inflation is likely to have increased, as oil prices rose again. Unusually, PPI is released before CPI, which is due tomorrow. As a result, PPI could carry more weight than usual for markets."

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