EUR/USD: ECB needs to contain fragmentation risks to offer more support for the euro – MUFG

The stronger US dollar has helped drag EUR/USD back towards the 1.05 level. In the view of economists at MUFG Bank, the European Central Bank (ECB) will need to contain fragmentation risks in order to support the euro.

Central Bank Forum provides more insights into ECB policy

“The euro failed to derive support yesterday from hawkish comments by ECB President Lagarde in her flagship speech at the Central Bank Forum in Sintra. While she continued to outline the ECB’s plan to begin raising rates by 25 bps in July and by potentially a larger 50 bps in September followed then by gradual hikes beyond, she did emphasise yesterday that ‘there are clearly conditions in which gradualism would not be appropriate’.” 

“It is of crucial importance for the ECB to contain fragmentation risk to enable the ECB to raise their policy rate as much as required to dampen upside inflation risks. The main risk the ECB faces by announcing the size of the new tool is that it could disappoint market expectations compared to the alternative of leaving it more open-ended.”

“To offer more support for the euro, the ECB needs to successfully contain fragmentation risks that will allow it to keep raising their policy rate as required to fight inflation.”