Economists at Société Générale discuss EUR/USD outlook ahead of the European Central Bank (ECB) Monetary Policy Decision.

ECB could tempt buyers on Euro dip after gains fizzled out following Fed pause

The ECB will have to out-hawk the Fed today to tempt buyers to reload EUR/USD longs.

The pair understandably wavered after the Fed decision but a 25 bps hike today by the ECB and prospect of another increase in July and possibly September means the policy rate and bond yield differentials will narrow, provided the Fed holds fire. 

Downside risks to the currency outlook stem essentially from the rally in risk assets fizzling out and European economic growth languishing compared to the US. 

The technical recession and stagflationary backdrop do not quite enhance the appeal of the single currency or European risk assets (making abstraction of relative valuations), but in a FX regime where rate differentials are governing the price action, there is a tactical case for EUR/USD to target higher levels