EUR/USD Consolidates Near Fair Value as ECB Hike Expectations Rise

European Central Bank (ECB) policymakers are entering their next rate decision on September 10th with renewed confidence, thanks to stronger German data. The EUR/USD has been consolidating in the mid-to-upper 1.16s, reacting little to better-than-expected German IFO business sentiment and GDP releases.

The recent recovery in yield spreads has provided fundamental support to the Euro, but Scotiabank strategists Shaun Osborne and Eric Theoret see little room for additional near-term strength as spot trades slightly above their fair value estimate of 1.1622.

Markets have nearly fully priced a 25-basis-point hike and further tightening, with short-term rates markets reflecting a cumulative 42 basis points of tightening by year-end.