EUR/USD: ECB’s hawkish policy pivot offers more support for the euro – MUFG

The bias for the EUR/USD is neutral, according to analysts at MUFG Bank. They see the pair in the 1.1050-1.1650 range over the next weeks. They warn the euro could weaken sharply if the Federal Reserve raises interest rates in larger increments than currently expected. 

Key Quotes:

“Higher yields in Europe should help provide more support for the EUR and could prove to be an important game changer for future performance. Short EUR positions in recent years have been built up on the anticipation that ECB policy will remain loose which will be more seriously challenged going forward. Low yields in Europe prompted record portfolio outflows into foreign debt by European investors over the past year. A reversal of those flows could help to lift the EUR more than expected.”

“The Fed is expected to raise rates by over 150bps by the end of this year with a larger 0.50 point hike now seen as the most likely outcome from the upcoming FOMC meeting on 16th March. Without the ECB’s hawkish policy pivot, EUR/USD would likely be trading closer to the 1.1000-level.”

“Risks for the EUR are more balanced now. The EUR could weaken more sharply than expected if the Fed raises rates in larger increments and starts shrinking their balance sheet sooner and faster than expected to bring policy back to neutral sooner. The EUR could come under more selling pressure initially as well if Russia launches a full on invasion the Ukraine with the aim to take control of the whole country and restricts energy supply to Europe in retaliation for sanctions. On the other hand, the EUR could strengthen more than expected if the ECB outlines plans in March to end QE sooner than Q3 and talks up the possibility of multiple rates hikes which would bring an end to negative rates in Europe.”