ECB Rate Hike Expectations Bolster Euro Amid Energy Price Risks
The European Central Bank's (ECB) September rate hike is already fully priced in by markets, according to recent data. The euro has been rising against the U.S. dollar, currently trading above 1.14, following a statement from ECB Governing Council member Simkus that the likelihood of a rate hike remains higher than standing pat.
Simkus' comments align with Lagarde's remarks during her press conference, where some policymakers questioned whether action should be taken now and pledged to closely monitor incoming data over the coming weeks. UOB interprets this as a clear signal that the ECB is inclined towards further tightening.
As long as market expectations for ECB rate hikes remain intact, the euro's downside is relatively limited, even with the Federal Reserve remaining in its hiking cycle. The narrowing interest rate differential between the U.S. and Europe provides structural support for the euro, according to UOB.
The bank expects a 25-basis-point rate hike in September, raising the deposit facility rate from 2.25% to 2.50%, marking the final hike of the current cycle, followed by an 'extended pause'. However, if persistently high energy prices lead to stronger second-round inflationary effects, 'the possibility of further tightening cannot be ruled out', UOB notes.