📝 ECB Balance Sheet Contraction Could Outpace Fed By Next Year: Nordea

We expect the ECB balance sheet to contract by more than EUR 1400bn by the end of next year. We do not expect the decline in excess liquidity to have any major impact on EUR overnight rates, while also Euribor rates may stay relatively close to the €STR swap curve. The EUR 1400bn contraction estimated to take place in the Eurosystem balance sheet until the end of next year is actually not that much behind the Fed, whose balance sheet is set to contract by around USD 1700bn by the end of 2023, assuming it follows the path it has set for its balance sheet contraction. In fact, by the middle of next year, the ECB balance sheet could actually have contracted at a faster pace compared to the Fed.

Relative balance sheet development between the Eurosystem and the Federal Reserve could actually be slightly supportive of the EUR vs the USD over the next year rather than the opposite, despite most headlines concentrating on the Fed’s quantitative tightening.

- Nordea