Goldman: Divergent, For Now

Goldman Sachs write “the ECB is widely expected to strike a very different tone from other G10 central banks with a 50bp rate hike and steady guidance that there is more to come.”

• “And this hike will be delivered in a very different environment than in December, when a hawkish policy path led to more mixed results for the Euro as sovereign spreads widened over fears of tightening into a slowdown.”
• “However, none of this should come as much of a surprise to markets, so we think the scope for EUR outperformance is still limited even if the ECB offers this divergent message.”
• “Looking beyond this week, we expect the real test will be whether activity and inflation data allow this diverging outlook to continue, and we see risks that the Fed could need to hike for longer than the market is currently pricing or the ECB might curtail its ambitions if headline inflation cools substantially.”
• “Over the medium term, we still think that more substantial EUR/USD upside would require better prospects for capital returns to bring portfolio flows to the region. There are tentative signs that this has started, and from very depressed levels, and it would be quite important if that starts to gain more traction.”