The EUR has been supported of late, regardless of ECB President Draghi reiterating that the central bank is ready to turn more aggressive on monetary policy. He stressed that signs of a sustained turnaround in core inflation have somewhat weakened of late.
However, it must still be noted that inflation expectations as measured by 5y forward breakeven rates have been rebounding. This appears to be on the back of the Euro’s recent depreciation and somewhat more constructive growth conditions.
Should such a trend remain intact, investors will increasingly question the ECB’s readiness to consider policy action such as cutting the deposit rate negative. Indeed, central bank members including Governing Council member Coeure stressed this week that there is no precommitment.
As a result to the above outlined conditions the single currency may face further position squaring related upside risk. This is especially true as risk sentiment turned more unstable of late. Considering intact growth uncertainty as related to Asia and as we expect the Fed to stay on track with tightening monetary policy in December, investors’ appetite for risk assets is likely to decrease towards the end of the year.
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