Euro: Downside risk against US Dollar as ECB hikes – BBH

Brown Brothers Harriman’s (BBH) Elias Haddad highlights EUR/USD trading defensively near 1.1530 ahead of an expected 25 bps European Central Bank (ECB) rate hike to 2.25% and updated projections likely downgrading growth. With Eurozone inflation elevated but activity soft, Haddad expects EUR/USD to edge lower and stabilize closer to 1.1400, reflecting stronger US growth relative to the Eurozone.

Euro pressured by weak growth outlook

"EUR/USD is trading on the defensive around 1.1530. The ECB policy rate decision is today’s highlight (1:15pm London, 8:15am New York) followed 30mins later by ECB President Christine Lagarde’s press conference. The ECB is set to end a seven meeting pause with a 25bps policy rate hike to 2.25% because of 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 indicates 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 edge lower and stabilize closer 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.)