ECB Tolerance Tests
Headlines regarding the upcoming ECB asset quality review and stress tests have started to attract investor attention, but at the same time it appears the ECB is being tested itself on the exchange rate. EURUSD has firmed of late, and with the Fed and BoE trying to solidify their dovish guidance, the ECB is expected to respond in kind. Although this view has merits, without dwelling too much on their upcoming steps, it is important to note that like the Fed, the ECB probably sees the currency as a secondary policy variable. Firstly, transmission to underlying conditions in an adverse manner is limited; secondly, markets need to acknowledge that for now a strong EUR has not affected the continued improvement in balance of payments.
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