Supply chain disruption and elevated energy costs are weighing on euro area GDP. However, economists at ANZ Bank believe that the recovery is becoming more uneven rather than faltering. They expect the yield curve to steepen, which can lend the euro support.

Markets start to price change in ECB policy

“Against the current backdrop of uneven but firm growth, the market may continue to bring forward the timing of expected ECB rate rises.”

“We expect that above-trend growth will continue into 2023 and possibly beyond. The prospect of high investment in climate remediation and digital development also supports the view that growth could remain higher for longer.”

“We expect that the ECB will strongly resist calls for early interest rate rises and will be very patient before it shifts its guidance. We expect ECB President, Christine Lagarde, will reinforce that message at the 28 October monetary policy meeting and press conference.”

“We think that the yield curve will steepen as opposed to bear flatten. Such a development would also normally be associated with EUR appreciation. In fact, the ECB may view a modest appreciation in the currency as preferable to monetary policy adjustments. We continue to forecast moderate EUR appreciation versus USD.”

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