Euro Gains Credibility Edge Over Dollar Amid Fed Uncertainty

The European Central Bank's (ECB) recent actions have boosted the Euro's credibility and may give it an advantage over the Dollar in the coming week, according to DBS Group Research. ECB Governor Philip Wee argues that the institution's focus on inflation underscores its institutional credibility.

Last week's governing council meeting reinforced the ECB's willingness to deliver the monetary policy needed to return inflation to target. Despite two hikes in June and September, the Euro-positive case is less about the ECB's hawkishness than its institutional credibility. Wee emphasizes that the ECB prioritizes above-target inflation over the risks to a resilient Eurozone economy.

The contrast with the Federal Reserve (Fed) is becoming hard to ignore. Fed Chairman Kevin Warsh has stressed the need to restore price stability, but his rejection of forward guidance has left markets with less clarity over the Fed's reaction function. With a US rate hike now heavily discounted, a Fed hold would force a potentially sharp repricing, pulling the Dollar lower.