The European Central Bank (ECB) paved the way out of the pandemic-era support measures but at the same time retained flexibility to react to unforeseen developments. Economists at Nordea see more upside potential for EUR bond yields and downside for the EUR/USD.

Net asset purchases to end in H1 2023, first hike in late 2023

“The ECB will end net PEPP by the end of March 2022 and introduced a path for tapering its bond purchases, albeit not quite to zero.”

“The path for asset purchases basically excludes the chance of rate hikes already next year – we expect net asset purchases to end in H1 2023 and see the first rate hike in late 2023.”

“We see falling ECB bond purchases supporting a gradual rise in longer euro-area bond yields, and see steepening potential on the EUR curve and room for some widening in euro-area bond spreads.”

“We find there is more room to reprice the Fed outlook compared to the ECB, and expect EUR/USD to fall further next year.”