After the European Bank raised interest rates, the euro rose sharply. Why did investment banks say it was too early to raise expectations?

Although the euro rallied sharply after the European Central Bank raised interest rates last week,But Asmara Jamaleh, a researcher at Intesa Sanpaolo Bank, is cautious about raising her euro forecast.

After the European Bank raised interest rates, the euro rallied sharply. Why did investment banks say it was too early to raise their expectations? (Figure 1)

Although the European Central Bank's actions and revised inflation forecasts have supported the euro's recent gains, Jamaleh believes it is too early to raise inflation forecasts given the uncertainty surrounding the Federal Reserve's decision.

After last week's ECB meeting, the euro rallied sharply against the dollar, rising from a low of 1.0802 to a high of 1.0962. As expected, the ECB implemented a 25 basis point rate hike, bringing the refinancing rate to 4.00%. In addition, the ECB's raised inflation forecast provided further support for the euro, potentially paving the way for a more aggressive rate hike than market expectations.

Jamaleh said that the development supports the forecast of two further interest rate hikes by Union Bank of São Paulo in July and September.

Although the recent exchange rate trend has been close to the one-month short-term target of 1.09 for Intesa Sanpaolo, Jamaleh suggested considering a correction to at least 1.10.

However, considering the uncertainty of the Federal Reserve's decision following the July FOMC meeting and the risk of the Federal Reserve confirming its forecast for a second rate hike, Union Bank of São Paulo maintained its one-month forecast for EUR/USD at 1.09 unchanged.

This suggests that if the Fed raises interest rates by a further 50 basis points, the euro could experience a partial and temporary pullback before returning to its upward trajectory.

Mr. Jamaleh said: "The risk to currency forecasts is upward skewed, meaning the euro could strengthen and reach the 1.10 level sooner than expected.

From a long-term perspective, Italy's Intesa Sanpaolo Bank's forecast remains unchanged, expecting the euro to trade at 1.11, 1.12, and 1.14 against the dollar in three, six, and 12 months, respectively.

While the recent ECB meeting and the resulting exchange rate movements were encouraging for the euro, Jamaleh stressed the need for caution and further monitoring of the Federal Reserve's decision before revising the euro forecast.

After the European Bank raised interest rates, the euro rallied sharply. Why did investment banks say it was too early to raise their expectations? (Figure 2)

EUR/USD daily chart

At 10:07 on June 19, Beijing time, the euro was trading at 1.0937/38 against the dollar.

Click to inquire about transaction account opening

Please indicate the source: https://www.daoctech.com/fxnews/364.html

Disclaimer: The content of this article does not represent the views of the Institute of Foreign Exchange. The content is for reference only and does not constitute investment advice. Investors operate accordingly at their own risk.