Key Moments
- BNY’s Geoff Yu notes that the ECB’s February decision has limited further euro gains. Policymakers seem comfortable with current guidance.
- BNY iFlow data show that Eurozone and cross-border investors have increased EUR holdings. Eurozone investors now appear as the marginal driver of recent moves.
- Changes in Eurozone hedging toward U.S. assets are a key factor shaping EUR performance and influencing preferences for the Dollar.
ECB Stance Seen Containing Euro Upside
BNY’s EMEA Macro Strategist Geoff Yu reports that the ECB’s February policy outcome restrained additional euro strength. The Governing Council appears satisfied with its current communication and maintains a high threshold for reacting to currency moves.
Yu adds that only much weaker inflation in Germany, Spain, or the Netherlands would shift the ECB’s inflation outlook and trigger a stronger policy response.
Investor Positioning and iFlow Insights
BNY’s iFlow data show that EUR/USD price action is increasingly influenced by Eurozone-based investors. These investors have raised hedging levels on U.S. portfolios and adjusted to changing Dollar preferences.
Yu notes that last year’s largest EUR/USD moves occurred when both cross-border and Eurozone investors increased EUR holdings. Cross-border investors played a major role by reducing a previous underweight position in the euro.
Eurozone Hedging Behavior as Marginal Driver
BNY highlights that overall EUR holdings have risen. This suggests recent euro performance is driven more by hedging strategies than by asset price gains alone. Currency overlays are now a key factor in EUR moves.
Eurozone investors have stepped up hedging on external portfolios, focusing on U.S. assets. This behavior is a central factor supporting the euro and influencing EUR/USD flows.
| Driver | Investor Type | Impact on EUR |
|---|---|---|
| Earlier reduction of EUR underweight | Cross-border allocators | Boosted EUR holdings in H1 last year |
| Increase in total EUR holdings | Eurozone / EUR-denominated allocators | Now seen as marginal driver of EUR performance |
| Higher hedging on overseas portfolios | Primarily Eurozone investors | Supports EUR vs USD beyond asset price gains |
Policy Implications and Dollar Preference Shift
Yu notes that the ECB may look to the Federal Reserve to limit further market pricing of rate cuts. At the same time, the ECB might adjust its policy or communications to manage evolving domestic portfolio preferences.
This could include recognizing non-monetary factors behind weaker Dollar demand. Combined with ongoing hedging flows, these dynamics help explain current and expected EUR/USD behavior.
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