Euro Downside Risks Still Intact post-ECB says HSBC
- Written by: Sam Coventry
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Photo: © Angela Morant/ECB.
According to HSBC's FX strategists, the European Central Bank (ECB) offered little reason for EUR-USD or EUR-GBP to strengthen during its policy meeting on Thursday, which leaned dovish overall.
Andrews noted that the Euro gained ground immediately after President Christine Lagarde’s press conference as markets interpreted her remarks on the neutral rate as less dovish than expected.
As of December 12, 2024, EUR-USD traded around $1.0491, and EUR-GBP was at approximately 0.82428, reflecting a modest post-meeting rally in the Euro driven by market reactions to Lagarde’s comments.
"This reaction may be over-reading Lagarde’s comments on a topic she seemed reluctant to discuss,” Nick Andrews, Senior FX Strategist at HSBC, observed. While some viewed her neutral rate remarks as hawkish, the broader ECB stance remained dovish.
The ECB cut the deposit facility rate by 25 basis points to 3.00%, slightly downgraded growth and inflation forecasts, and removed language about keeping policy rates "sufficiently restrictive for as long as necessary."
Key Takeaways from the ECB Meeting
HSBC emphasised three critical messages from the ECB:
- Risks to economic growth are now skewed to the downside.
- Inflation risks have shifted to being two-sided, a departure from their previous upward bias.
- Labour market demand is slowing, signalling potential challenges ahead.
“If slowing labour market demand translates into rising unemployment, as Andrews and HSBC anticipate, it could undermine the real income recovery that the ECB expects to fuel economic growth in 2025 and 2026,” Andrews stated. He added that political instability in France and Germany and potential US trade tariffs could further exacerbate these risks.
Risks of Prolonged Restrictive Policy
HSBC thinks the ECB’s focus on sticky wage growth and domestic inflation—lingering effects of the pandemic and energy crises—could lead to rates staying restrictive for too long. "At 3.00%, policy remains restrictive," Andrews noted, "but determining when it shifts to neutral or stimulative is uncertain.”
Lagarde’s reference to a previous ECB paper suggesting the neutral rate lies between 1.75% and 2.5% proved 'hawkish', as it suggests expectations for the rate at which the ECB quits cutting might be higher than previously assumed.
"EUR-USD moved higher immediately after the press conference as markets thought President Lagarde's comments on the neutral rate weren't dovish enough," says Andrews.
Bond yields and the Euro climbed, with EUR-USD and EUR-GBP showing upward momentum in the immediate aftermath.
However, Andrews cautioned against drawing firm conclusions. "As every economist would agree, the neutral rate is highly uncertain. ECB policy will require a degree of trial and error," he explained.
Outlook for EUR-USD and EUR-GBP
HSBC predicts that should growth underperform and inflation expectations fall below target, the ECB is likely to continue cutting rates. "This outlook is why we see downside risks for EUR-USD and EUR-GBP," Andrews concluded.
The ECB’s dovish signals and the uncertain trajectory of its policy decisions underscore the challenges facing the Euro as it navigates an environment of slowing growth and evolving inflation risks.
