From a piece by Capital Economics on the European Central Bank and the EUR/USD
In brief:
- The ECB seems set to raise interest rates even later than we had previously assumed and we are now pencilling in the first hike for September 2019.
- Accordingly, we have made small downward revisions to our Bund yield forecasts and now see the euro depreciating to $1.10 next year.
More:
- since President Draghi said that purchases would continue until at least September and that they would "certainly not stop suddenly", we now expect a mini-taper over the final three months of 2018 to bring the QE programme to a close
- Given his emphasis on the need for "patience" and the news that core inflation fell in October, we now expect the first increase to come in September and see the main refinancing rate ending 2019 at 0.5% (previously 1.0%)
- Financial markets ... two-year interest rate expectations implied by overnight indexed swaps are just -0.1% ... And the implied probability of a hike by the end of 2018 has fallen from a peak of 85% in June to only 17% now. However, given that we still see the US Federal Reserve raising interest rates by significantly more than markets expect next year, our new forecast for ECB rates implies that there may be a bit more downward pressure on the euro exchange rate to come. We now see the single currency ending 2018 at $1.10 - below our previous forecast of $1.15
