As expected, the European Central Bank (ECB) kept the interest rate unchanged on Thursday and announced the potential end of QE by the third quarter. Analysts at Wells Fargo still believe the ECB is on pace to lift its Deposit Rate 25 bps at its December meeting. They see some weakness ahead for the euro relative to the dollar.
Key Quotes:
“We had expected the ECB to announce an accelerated tapering at today's announcement, although the wind down of its bond purchases was more aggressive than we had expected. Altogether, today's decision leaves our ECB monetary policy outlook very much on course. We expect the ECB to end its asset purchases during or by the end of Q3, something ECB President Lagarde indicated in the post-meeting press conference. And the contours of the ECB's monetary policy approach leaves the central bank on course, in our view, to deliver an initial 25 bps Deposit Rate hike at its December 2022 monetary policy meeting. After an initial spike higher, the euro has reversed course and is now weaker against the U.S. dollar.”
“As far as our views on the euro going forward, we expect a more gradual pace of ECB policy adjustment relative to the Fed, which should place depreciation pressure on the euro over the medium-term. In addition, we continue to believe financial markets are moderately 'over-priced' with respect to ECB tightening, and as markets adjust to a more gradual pace of ECB tightening, that should also contribute to euro weakness.”
