ING analysts Chris Turner, Benjamin Schroeder and Dmitry Dolgin discuss how the ECB’s expansion of the EUREP facility underpins the Euro’s international role and may influence EUR/USD. They argue that greater reserve demand for Euro assets and trade invoicing supports a stronger Euro over time, while the ECB appears relatively tolerant of Euro strength, with ING’s baseline seeing EUR/USD higher by year-end.

ECB repo expansion and Euro strength

"Debate is growing about whether the ECB’s desire for a strong international euro means it is prepared to accept a strong nominal euro as well. The official take will be what the appreciation of the nominal trade-weighted euro means for the ECB inflation forecast and whether inflation undershooting would prompt rate cuts. Our take is that it would require a move much closer to 1.25 in EUR/USD before that conversation grows serious."

"However, the current geopolitical environment seems to have prioritised the need for a global euro. And we certainly seem a very long way from the period in the mid-2000s when the euro’s role as a reserve currency seemed problematic for the ECB. That said, even at these levels, we are hearing today that the French government wants a further economic assessment of whether promoting the use of the euro will push up EUR/USD and hurt French exporters."

"Our current baseline sees EUR/USD ending the year at 1.22 – with upside risks."

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