Ulrich Leuchtmann, Head of FX and Commodity Research at Commerzbank, discusses the vagaries of inflation momentum, the reaction function of the central banks and the EUR/USD outlook. 

The ECB disadvantage is less relevant

“What is more relevant is how endogenous inflation momentum develops (i.e. prior to the controlling intervention of the ECB). Because at present uncertainty about that is particularly high, that is decisive, not the ECB’s reaction function. And because that is the case the old difficulties of joint monetary policy for a heterogenous continent like Europe are less relevant at present. They are irrelevant compared with endogenous inflation momentum.”

“The fundamental disadvantage of the particular European monetary policy against that of the Fed plays a subordinate role and is therefore not a relevant factor putting pressure on EUR/USD. While that is the case, I am principally EUR-positive. However, we should not make the mistake of believing that this will always be the case.”