Published: 2024-06-06T13:48:36.000Z
EUR flows: Lagrade Back Lane Clearer Guidance
Director of Research , Macroeconomics and Strategy
4
While Largarde did not provide specific guidance, she confirmed the clear message from ECB Lane that the lagged effects of tighter policy will still feedthrough H2 2024 and 2025; policy is now forward looking and real policy rates have risen and need to be lowered.
This all means that if inflation comes in broadly as the ECB expects it is likely to undertake 25bps cut in September and December to get real policy rates back down and reduce the risk of an inflation undershoot. This is not quiet, but nearly discounted in the money market. Indeed, the market can shift to discounting a 2.0% depo rate, but this will take more ECB rate cuts and inflation data remaining under control or falling below 2%. Thus we see a slow decline in 2yr German yields in H2 2024. ECB action could be largely neutral for the EUR. On EUR/USD, we feel lagged policy will slow the economy and fuel more rate cuts bets for H2 2024 and 2025 -- we see 175bps by end 2025. However, the market will now be subdued ahead of tomorrow's U.S. payrolls data.