Euro: ECB tightening seen limiting downside – BBH

Brown Brothers Harriman’s (BBH) Elias Haddad reports EUR/USD is trading heavy just below 1.1600 as Eurozone August Consumer Price Index (CPI) confirmed easing underlying inflation, with core and services measures slowing. Despite this, above-target inflation and a firmer growth outlook give the European Central Bank (ECB) room to hike, with markets nearly fully pricing a 25 bps move to 2.50% on September 10 and 75 bps over twelve months, making fresh lows below 1.1400 unlikely.

ECB path supports Euro downside floor

"EUR/USD is trading heavy just under 1.1600. Eurozone August CPI showed easing underlying inflation pressures."

"Headline CPI matched consensus at 3.3% y/y vs. 2.9% in July on higher energy prices. However, core inflation undershot at 2.4% y/y (consensus: 2.5%) vs. 2.5% in July while services inflation slowed to 3.0% y/y vs. 3.3% in July."

"The swaps curve has virtually fully priced in a 25bps ECB rate hike to 2.50% on September 10 and a total of 75bps of tightening over the next twelve months."

"Above target Eurozone inflation and a firmer growth outlook give the ECB scope to raise rates."

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