Goldman ECB Not Hawkish Enough To Support

Goldman Sachs note that “at this week’s ECB meeting, President Lagarde emphasized that policy is “on a journey” towards higher rates, but notably the policy path she appeared to articulate was essentially unchanged from earlier in the year, despite significant upside inflation news since then. While in line with our economists’ expectations for the meeting, this communication came as a disappointment to market pricing as the ECB revealed a more dovish reaction function to the inflation news than the market had discounted. This comes on top of already-negative near-term risks for the Euro stemming from the French presidential election, among other things. The first round results were a net positive for President Macron and if anything his lead in the polls has expanded a bit since then, but the race may be close enough to command further downside hedging interest in the coming weeks given the stakes. Our bullish structural view on the Euro is built primarily on exiting negative rates, further European capital market integration, and a more balanced global cycle. We therefore see reshuffling of front-end pricing as a more tactical risk to be navigated, while halting the move towards integration or rising global recession risks would present more fundamental challenges to our view. In the near-term, we think investors looking to position for a more sanguine activity outlook should consider EUR/SEK downside, as we think the 180bp upside surprise to inflation in Sweden should prompt a more convincing policy pivot from the Riksbank in 2 weeks.”