Euro: How are fiscal risks limiting gains against the US Dollar? – BBH

EUR/USD is under pressure below 1.1200 following weaker-than-expected Eurozone PMI data, according to Brown Brothers Harriman (BBH) strategist Elias Haddad, although the figures continue to point to robust growth. With inflation above target and growth proving resilient, the ECB has scope for further rate hikes, limiting policy divergence with the Fed. However, Haddad cautions that France’s fiscal difficulties could drag EUR/USD towards 1.1000.

Why is the Euro under pressure after weaker PMI?

"EUR/USD is on the defensive under 1.1200. The Eurozone October PMI was weaker than anticipated, but still indicative of robust growth. The composite PMI fell to a four-month low at 51.9 (consensus: 52.7) vs. 53.1 in September."

"The details showed both services and manufacturing activity slowed, with French private sector output moving back into contraction."

"Above target Eurozone inflation and a resilient growth outlook give the ECB scope to deliver additional hikes. The swaps curve implies nearly 75bps of tightening to 3.25% in the next twelve months. That limits policy divergence with the Fed and the drag on EUR/USD."

"However, France’s fiscal troubles can drive EUR/USD down to 1.1000."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)