The June European Central Bank (ECB) underlined a move away from unconventional policy. But ECB policy gradualism suggests that euro bulls will have to wait until 2023 for an appreciation, economists at CIBC Capital Markets report.

ECB tightening is imminent

“The bank has clearly committed to policy gradualism, as they look to hike the deposit rate for the first time since 2014, by 25 bps.”

“Absent a material correction in inflation and inflation expectations, we should expect 50 bps in September. Such a move will result in a positive deposit rate for the first time in eight years. This would favour long-term FX diversification appetite and residual EUR support. However, as the ECB looks to tighten policy, fragmentation risk, namely yields in peripheral markets blowing out, risking debt sustainability, remain a concern.” 

“Avoidance of another round of debt concerns, allied to avoidance of fragmentation risks, will help limit near-term EUR downside against a USD which currently remains risk and rate supported.”

“Over the medium run, expect diversification interest to sustain support EUR valuations.”