Brown Brothers Harriman’s Elias Haddad (BBH) anticipates the European Central Bank (ECB) will end its pause with a 25 bps hike to 2.25% as core and services inflation run above forecasts.
However, weaker Eurozone growth prospects and likely downgraded projections lead the bank to expect EUR/USD to decline, even as ECB tightening helps limit downside in a stagflationary backdrop
ECB tightening into weakening Eurozone growth “On Thursday, the ECB is set to end a seven meeting pause with a 25bps policy rate hike to 2.25% to curb rising inflation pressures.” “In May, Eurozone core CPI rose to a 13-month high at 2.5% y/y, tracking closer to the ECB’s Q2 severe scenario (2.4%) than to its baseline forecast (2.2%) and adverse scenario (2.3%). Moreover, services CPI surged to a seven-month high at 3.5% y/y, raising the risk of a persistent pickup in inflation.” “The ECB will also publish its June macroeconomic projections which will likely show a downgrade to its growth forecast.” “PMI data indicate Eurozone real GDP could contract by -0.2% q/q in Q2, a pace that sits between the ECB’s adverse (-0.1%) and severe (-0.3%) scenarios and below its current baseline forecast of +0.1%.” “We expect EUR/USD to fall to 1.1400, reflecting a stronger US growth outlook relative to the Eurozone. ECB rate hikes in a sluggish growth, high inflation environment, is not bullish for EUR but should help cushion the downside.” Author