According to MUFG’s Derek Halpenny, the minutes from the latest European Central Bank (ECB) meeting provided little new information but confirmed the ECB's openness to another rate hike, aligning with MUFG’s forecast for a 25 basis point increase in September [1]. Despite the euro being the weakest G10 currency in July, Halpenny notes that the 2-year yield spread has begun to shift in favor of the euro, suggesting the potential for a moderate EUR/USD recovery in the coming weeks [1].
Halpenny highlights that the ECB is less concerned about longer-term inflation expectations becoming unanchored, as evidenced by the decline in the 5y5y inflation swap rate since the initial ceasefire agreement [1]. He adds that unless there is a sharp rebound in crude oil or natural gas prices, longer-term inflation expectations remain well anchored [1].
Looking ahead, MUFG continues to see risks of US yields turning lower, which could further reinforce upward momentum for the EUR/USD pair [1]. The combination of a turning yield spread and the possibility of declining US yields underpins MUFG’s view that the euro may recover some ground against the US dollar in the near term [1].
CONCLUSION
MUFG analysts suggest that shifting yield spreads and anchored inflation expectations could support a moderate recovery for the euro against the US dollar. The outlook is contingent on ECB policy actions and US yield movements, with a 25bp ECB rate hike in September remaining a key possibility.