The euro is trading below the 1.1200 mark against the US dollar ahead of the release of the European Central Bank (ECB) Account. The ECB Account, detailing the September 9-10 policy meeting where the bank unanimously raised the policy rate by 25 basis points to 2.50%, is expected to reinforce the case for further rate hikes. However, the message may appear somewhat outdated due to the recent surge in bond yields.
Despite this, above-target inflation and a stronger growth outlook in the Eurozone provide the ECB with the scope to continue tightening monetary policy. Market expectations, as reflected in the swaps curve, suggest nearly 75 basis points of additional tightening to 3.25% over the next year. This limits the policy divergence with the US Federal Reserve and reduces downward pressure on the EUR/USD exchange rate.
Nevertheless, stronger US economic growth compared to the Eurozone, coupled with France's worsening budget crisis, keeps the EUR/USD exchange rate at risk of further declines in the coming months.