ECB to leave the euro sluggish as its policy has sequence limitations – TDS

There are some regions where earlier tightening is more plausible than others. In the view of strategists at TD Securities, the Bank of England (BoE) is certainly one of them. The Bank of Canada (BoC) also has some risk of earlier tightening. Then there are some central banks where the hawkish repricing in curves looks more unreasonable. This includes the European Central Bank (ECB).

BoE and BoC in the first place to tighten

“We think there are some central banks that are more at risk of acting ‘early’ than expected. The BoE is certainly one of them.”

“CAD outperformance has been broadly based and even stretched in some places. That could create some pullback risk at next week's BoC meeting if the meeting is not hawkish enough.”

“Then there are some regions where there have been holdouts within the central bank community and hence, make it ripe for the market to call out their bluff. The RBA is the standout, since the central bank has been rather steadfast in keeping policy rates unchanged for the foreseeable future.”

“Then there are some central banks that are not quite there in terms of delivering on market expectations. Here, the ECB comes to mind. The reality is that in a reasonably hawkish scenario, the ECB won't be in a position to end QE until late next year, which puts 2023 (likely the latter half) as the risk scenario for tightening. Ultimately, this central bank backdrop leaves EUR rather sluggish overall.”