Credit Agricole on what's next for the euro
Credit Agricole CIB FX Strategy Research notes that the EUR rallied, Bund yields spiked and EGB curves bear steepened after ECB President Draghi signalled yesterday that the ongoing recovery in the Eurozone may warrant the gradual unwinding of monetary stimulus at some point in the future.
"Draghi's hawkishness and the potential upside for EUR hinge upon the credibility of two key assumptions that the President has made in his speech yesterday. The first is that the inflation expectations in the Eurozone remain firmly anchored. The second is that the Eurozone Phillips curve is alive and well so that the disappearing output gap in the Eurozone should ultimately boost wage growth," CACIB argues.
In that regard. CACIB notes that the upcoming Eurozone inflation data on Friday will be an early test to the above assumptions.
In particular, CACIB argues that using ECB's own FX pass through analysis, one would conclude that a move in EUR/USD back towards the highs around 1.15-1.16, could lower the HICP inflation by almost 0.3% over a period of 12M.
"If left unchecked, therefore, the EUR-appreciation could force the ECB to reconsider it's inflation outlook yet again before long. This much could suggest that the pair may lose some of its upward momentum before long," CACIB argues.
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