ECB unlikely to push for higher EUR rates; stagflation to keep EUR weak – BofA

Bank of America Global Research discusses the EUR outlook around tomorrow’s ECB March policy meeting.

“Stagflation is a clear and present danger for the Eurozone economy. With
the market still pricing positive ECB rates next year, we do not see
the ECB pushing for more this week, given high uncertainty.
High inflation also prevents the ECB from sounding too dovish. Trying to
be balanced and keep all options open, as our economists expect, while
also signaling policy normalization with an earlier end of QE, seems a
reasonable strategy to us, but one that should not affect the EUR much,
compared with market expectations,” BofA notes.

“As long as the war continues, we see further EUR downside risks. A protracted war and permanent sanctions will increase the shock to the real economy in Europe. If sanctions also cover energy, unlikely at this point but a high impact event, we could see a much weaker EUR.
The Fed in the meantime is set to start a gradual hiking cycle.
Diverging monetary policies could push EURUSD even lower. The risk
reversal, as well as inflation differentials, points to more EURUSD
downside,” BofA adds.

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