EUR: EU members indecision is not good news

The highlight of the day in the eurozone is the speech by European Central Bank
President Christine Lagarde at the IIF annual meeting in Washington. With two
weeks to go to the October ECB meeting, markets are almost fully pricing in a 75bp
hike (70bp embedded in the OIS curve) and a total of 230bp of tightening by mid-2023. There is a high probability that Lagarde will refrain from giving strong signals
to the market, and in any event, the implications for the euro should not be very
large given the currency has been significantly less sensitive to domestic monetary
policy expectations lately compared to historic standards. We’ll also hear from
Klaas Knot and Pablo Hernández De Cos later in the day.
We think that the ongoing discussion among EU members about price caps on
energy prices is set to have broader implications than the ECB rhetoric at this stage.
It still appears that member states cannot agree on the design of an EU-wide
measure, with proposals ranging from a radical cap on imported gas prices (here,
the issues would be higher demand and issues with non-Russian suppliers), to a
floating price corridor to avoid excessive volatility, to a less drastic support package
to shield the economy from large energy bills (at the risk of straining public
finances). Lingering indecisiveness is not good news for the euro, and we still see
downside risks into the September lows in EUR/USD (0.9540) this week.

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