ECB’s hawkishness on hikes is key for euro
The ECB’s tone this week is more important for the euro than the expected hold. A clear signal that the Bank remains willing to act beyond September is viewed as the main defence against renewed euro weakness.
Rate markets have already moved to price in close to two additional hikes by year end, lifting short term euro area yields back near their highs for the year.
Softer US inflation data has tempered Fed rate hike expectations, helping yield spreads move in the euro’s favour. This explains why the dollar has not strengthened further despite rising energy costs.