Increased likelihood of undesirable exchange rate volatility – Commerzbank

The Euro remained under pressure on Tuesday. Economists at Commerzbank analyze the common currency outlook ahead of the ECB meeting on Thursday.

ECB facing a bigger communication challenge

After the ECB signalled a continuation of the rate hikes for Thursday’s meeting at its previous meeting, the ECB is likely to find it difficult to move to a less explicit forward guidance without the market initially seeing that as a dovish signal.

However, there are increasing signs that the ECB too is no longer moving on autopilot. Increasing signs of tighter credit conditions in Tuesday’s Bank Lending Survey and renewed signs of an economic slowdown in Germany should soon dampen interest rate optimism with regard to the ECB.

The ECB is probably facing a bigger communication challenge than the Fed. That also suggests a higher risk of it ‘going wrong’ – i.e. the increased likelihood of undesirable exchange rate volatility.