Euro: ECB tightening expectations support pair – BBH

Brown Brothers Harriman’s (BBH) Elias Haddad expects Eurozone August headline Consumer Price Index (CPI) to accelerate to 3.3% year-on-year on higher energy, with core inflation steady at 2.5%. Above-target inflation and firmer growth give the European Central Bank (ECB) room to move rates toward the upper end of its neutral range, while swaps have nearly fully priced a September hike, which Haddad sees as supportive for EUR/USD and reducing the risk of fresh lows below 1.1400.

Inflation backdrop backs ECB normalization

"Eurozone August preliminary CPI inflation expected to quicken (Tuesday). Headline CPI is forecast at 3.3% y/y vs. 2.9% in July on higher energy prices, while core CPI should hold at 2.5% y/y for a second straight month."

"Above target inflation and a firmer growth outlook give the ECB scope to normalize the policy rate towards the upper end of its estimated 1.75% to 3.00% neutral range."

"The swaps curve has virtually fully priced in a 25bps ECB rate hike to 2.50% on September 10 and a total of 60bps of tightening over the next twelve months."

"That’s EUR/USD supportive and makes fresh cyclical lows below 1.1400 unlikely."