EUR/USD: Recovery depends on whether jitters extend or whether they are contained – Rabobank

The EUR/USD lost more than 200 pips on Wednesday amid the turmoil around Credit Suisse. On Thursday, the European Central Bank will have it monetary policy meeting. Analysts at Rabobank warn that a 50 bps rate hike may fail to lift the Euro if investors assume that it is deepening the risk of a downturn.

Key quotes: 

“The EUR has been impacted despite reports that the ECB will stay the course an announced the 50 bps move that its has already indicated.”

“Hiking rates by 50 bps against the backdrop of a jittery market and a tightening of financial conditions may fail to lift the EUR if investors assume that the central bank is deepening the risk of a downturn.”

“The best-case scenario is that jitters across the wider financial sector in Europe settle. This would allow the market to return its focus to economic fundamentals and specifically the risks around inflation. This would make it easier for the market to absorb a 50-bps rate hike from the ECB tomorrow and for EUR/USD to rally back above 1.06.”

“The market has already pared back expectations about how much further central banks can hike rates. Guidance offered by the ECB on this front tomorrow, and by the Fed and the BoE next week will be instrumental in setting the medium-term outlook for the FX market. Almost certainly further volatility is in store.”