EUR/USD: Lower for longer ECB rate prospects to weigh on euro sentiment – CIBC

Lower for longer European Central Bank monetary policy against an increasingly hawkish Federal Reserve suggests a depreciation in the euro in the coming year, in the view of Jeremy Stretch of CIBC Capital Markets.  

Medium-run growth assumptions to slow

“The December meeting is set to witness a discussion on the transition beyond the PEPP regime. The ECB is intent upon maintaining favourable financing conditions to perpetuate the recovery narrative. As a consequence, we expect the central bank to consider PEPP transitioning into the Asset Purchase Programme. However, the transition is unlikely to be seamless amidst issuer limits and question marks over the ability to purchase non investment grade debt.”

“Slower growth into 2023 will help limit medium-term price gains. Although headline HICP risks testing 13-year highs, the ECB’s adjusted inflation remit will allow the bank to look through short term price spikes, especially as core prices are expected to remain relatively well contained. Alongside fiscal policy developments, that will promote a lower-for-longer trajectory for interest rates, and as a result, a weaker EUR in 2022.”