BNY’s EMEA Macro Strategist Geoff Yu notes that the ECB’s February decision has capped further Euro strength, with the Governing Council likely comfortable with current guidance and a high bar for reacting to currency moves.
BNY’s EMEA Macro Strategist Geoff Yu notes that the ECB’s February decision has capped further Euro strength, with the Governing Council likely comfortable with current guidance and a high bar for reacting to currency moves.
BNY’s iFlow data show recent EUR/USD dynamics increasingly driven by Eurozone-based asset allocators, as they raise hedging on U.S. portfolios and adjust to shifting Dollar preferences.Eurozone hedging now key EUR driver'The European Central Bank February decision has helped prevent further euro strength, and we expect the Governing Council to be relatively comfortable with its current language. The bar for a direct policy response to euro strength remains high, and it would take far greater downside surprises in German, Spanish and Dutch inflation to materially drag the price outlook away from current projections.''The most significant move in EURUSD last year was driven by increased EUR holdings from cross-border and EUR-based asset allocators in H1. Our figures indicate that it was largely cross-border investors that materially reduced a heavy underweight EUR position.''In contrast, there has been a jump in the total EUR holdings figure, indicating that the current marginal driver of EUR performance is coming from Eurozone or EUR-denominated asset allocators and beyond what asset gains would justify.''The shift in behavior suggests that Eurozone investors have increased hedging on overseas portfolios, largely focused on U.S. assets.''Consequently, the ECB will likely rely on the Fed to limit further pricing of rate cuts but may also need its own adjustments to manage the shift in local preferences, including acknowledging the role of non-monetary factors in weaker dollar preference.'
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