The ECB raised its key policy rate by 25 bps to a record high of 4% in September, while consensus was fairly evenly split. The EUR failed to make any notable gains, despite the rate hike. Economists at HSBC expect a weaker EUR ahead.
Lower for longer
The statement supports our view that rates are likely to peak and remain at current levels for some time. At the press conference, ECB President Christine Lagarde denied that rates had peaked but acknowledged that focus was now likely to shift to a period of tight policy rates. And while the ECB may try to push a ‘higher for longer’ mantra for its rate outlook, it seems clear to us that the path is now ‘lower’ for the EUR.
A shift lower in EUR rate expectations from here, alongside the potential for US rate cuts to be priced out of the market, makes downside potential for EUR/USD most compelling. The external environment also does not appear to offer much solace for the EUR, with ongoing signs of global growth slowdown, amid the impact of monetary tightening.
