Synopsis:

HSBC provides insights into the potential factors slowing the descent of EUR/USD towards 1.05, highlighting persistent wage growth and geopolitical uncertainties as key deterrents to a swift decline. The bank outlines why a gradual adjustment is more likely than a rapid downturn in the near term.

Key Points:

• Inflation Concerns and Wage Growth: Despite a faster-than-anticipated drop in headline inflation, HSBC points out that strong wage growth remains a significant concern that could undermine confidence in inflation staying below the European Central Bank's (ECB) target. This issue was previously emphasized by the ECB as a critical factor in determining the timing of rate cuts.

• Geopolitical Risks and Energy Prices: The ongoing geopolitical tensions, particularly those affecting energy supply chains, present upward risks to energy prices. This volatility in energy costs is likely to restrain the ECB from providing definitive guidance on monetary policy adjustments post-June.

• ECB Policy Outlook: The uncertain economic backdrop, influenced by wages and geopolitical risks, suggests that the ECB may adopt a more cautious stance in its upcoming policy decisions. This could involve delaying or moderating the pace of anticipated rate cuts.

• EUR/USD Forecast: As a result of these factors, HSBC forecasts a gradual rather than abrupt decline in EUR/USD. The bank anticipates that these underlying economic and geopolitical factors will contribute to sustained uncertainty, influencing the currency pair's trajectory.

Conclusion:

HSBC's analysis indicates that significant inflationary pressures, particularly from wages, combined with geopolitical risks impacting energy prices, are likely to prevent a rapid depreciation of the EUR/USD. These elements are expected to lead to a more measured adjustment in the currency pair as the ECB navigates a complex economic landscape.