EUR: ECB remains behind the Fed in addressing inflation – Commerzbank

Euro Struggles Despite ECB Policy Adjustments

Michael Pfister from Commerzbank points out that, although the European Central Bank (ECB) has seen a more significant shift in tightening expectations compared to the Federal Reserve since the recent energy crisis, the Euro (EUR) still trails behind the US Dollar (USD) when it comes to real policy backing. He highlights that inflation forecasts for the Eurozone have climbed much more steeply than those for the United States, suggesting the ECB remains less proactive than the Fed. As a result, the USD is likely to maintain its strength if the conflict persists.

ECB Policy Shifts Fail to Boost the Euro

Pfister explains that while expectations for ECB action have been revised more aggressively than for the Fed, the difference is clear: since the onset of the war, markets have priced in a 40 basis point tightening for the Fed over six months, compared to 60 basis points for the ECB. This gap remains even when looking ahead to the December meeting, though slightly more tightening is anticipated by then.

However, he emphasizes that inflation expectations are the key factor in assessing which central bank is more assertive. A currency tends to benefit from rate hikes only if the impact of inflation is more than compensated. Historically, the Fed has managed this balance well, while the ECB has often allowed purchasing power to erode.

Examining inflation trends, Pfister notes that projections for Eurozone inflation in both 2022 and 2026 have adjusted much more sharply than those for the US, where expectations for 2026 have barely changed.

Given these developments, he concludes that if the war endures, the US Dollar is likely to retain its advantage over the Euro.

(This article was produced with the assistance of artificial intelligence and reviewed by an editor.)