Near-term ECB policy outlook has been the driver of EUR volatility this week. A diverging monetary plicy between Fed and ECB is set to boost the Euro, according to economists at MUFG Bank.
ECB policy rate to reach 3.00% by the end of this quarter
“We are sticking with our forecast for the policy rate to reach 3.00% by the end of this quarter. A scenario that is not fully priced into the eurozone rate market which is currently expecting a total of 93 bps of hikes to be delivered at the February and March policy meetings.”
“We expect ECB and Fed policies to diverge at the start of this year with the Fed set to slow the pace of hikes to 25 bps in February in response to further evidence of softening US inflation. It continues to favour a stronger Euro alongside the improving cyclical outlook for the Eurozone that is currently being priced into markets as recession risks are pared back.”