HSBC are looking for a higher EUR on the back of more ECB rate hikes still to come

HSBC forecast to expect two additional 25 bps rate hikes from the ECB over the northern summer compared to just one from the Federal Reserve. HSBC do caveat this with an acknowledgement that there are “upside risks” for further Federal Open Market Committee (FOMC) hikes though.

As a result, say the analysts, EUR should continue to be supported in the near term by the balance of risks from this short-term rate dynamic.

Beyond this short-term, immediate evaluation, of central bank decisions made from meeting to meeting, HSBC say they think there are structural grounds for future EUR strength as well. The quantitative tightening (QT) and broader shift by the ECB into positive nominal rate territory have caused a more significant underlying change in portfolio flow dynamics. Significant bond and equities inflows over the past year are unlikely to reverse anytime soon and should be of benefit to the euro.

And that EUR should also be supported by other external flows. HSBC note in particular that the performance of the EUR over the previous few years can be somewhat attributed to current account dynamics and thus an ongoing current account surplus in the region is probably supported by improving terms of trade, which justifies a stronger EUR.

This article was written by Eamonn Sheridan at Source