Commerzbank’s Michael Pfister argues that, despite a sharper repricing of European Central Bank (ECB) tightening versus the Fed since the latest energy shock, the Euro (EUR) still lags the Dollar (USD) in terms of real policy support. He notes Euro area inflation expectations have risen much more than in the US, implying the ECB remains less active than the Fed and that USD strength is likely to persist if the war continues.
ECB repricing fails to lift Euro
“Firstly, it is true that expectations regarding the ECB have been revised more sharply than those regarding the Fed. For the Fed, monetary policy tightening of 40 basis points has been priced in six-month’s time since the start of the war, whereas for the ECB it is 60 basis points. This difference remains the same even when considering expectations up to the December meeting, although naturally a little more tightening is priced in by then.”
“It is inflation expectations, however, that are the decisive factor in determining whether the ECB is now the more active central bank. A currency benefits from interest rate hikes when the losses caused by inflation are more than offset. The Fed has historically been adept at this, whereas the ECB has often tolerated losses in purchasing power.”
“Looking at the trend in inflation expectations, it seems likely that this will continue to be the case. In both 2022 and 2026, euro area inflation expectations have understandably corrected much more sharply, while US expectations have risen only moderately – for 2026, virtually no increase is discernible.”
“Therefore, I would assume that should the war continue, the USD is likely to remain ahead in light of these movements.”
(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)
Source: https://www.fxstreet.com/news/eur-ecb-still-lags-fed-on-inflation-response-commerzbank-202603310607
