There are many moving parts governing the devaluation of the euro and several important ones come into effect this week just as the Governing Council of the European Central Bank (ECB) meets – on Thursday – to agree a rate jump, the first since 2011.
Will the Nordstrom Pipeline be returned to service? How clearly can Christine Lagarde communicate her new Transmission Protection Mechanism (TPM) terms? Will the spread between German and Italian bond yields widen further?
FX strategist Jane Foley of Rabobank says ECB toe a thin line; a 25 basis point rate hike on Thursday won’t be enough, she told Capital.
“That said, [the] the greenback is weakening across the board this morning. This pushed EUR/USD away from parity, which should provide some breathing room for the ECB if the better tone in risk appetite continues during the week.
She continues: “At the same time, given the risks of recession in the euro zone, the scope for the ECB to raise rates could be limited.”
So is the situation with the Bank of England: any rate hikes may not have an impact on the pound if the market is too distracted by the growth that risks sinking into the economy.
ECB pressures are extreme
- On the one hand, the ECB must fight inflation, but on the other hand, it must define a fragmentation rule that prevents an explosion in peripheral bond yields, says Foley.
- Specifically, the countries of Club Med – Greek, Italian and Spanish debt. “This suggests market intervention that on many levels defeats its purpose of normalizing politics,” she says.
- “If the ECB does not sell its policy well to the market, the euro could come under further pressure.”
Capital’s currency strategist, Piero Cingari, says bluntly that the ECB is facing its worst nightmare ever. Inflation is at a record level (8.6% in June), the economy is showing symptoms of serious disorientation and the trade balance deficit continues to widen.
“The ECB, he explains, is considering a mechanism to control the spreads between safe securities, such as German bonds, and those of the periphery. However, at a time when investors want to see central banks focus on the fighting inflation through rate hikes, new stimulus measures are not a positive signal for a currency.
Inflation battle fatigue
Just check the Japanese yen for reference here, he says. Then there is the crisis of gas and energy costs. The worst-case scenario for the euro zone is that it loses control of the battle against inflation entirely.
“The Dutch TTF, the benchmark for gas prices in Europe, has shot up 500% over the past year,” Cingari explains, “due to Russian supply issues and the future looks quite bleak on that. forehead.
“In comparison, gas prices in the United States have climbed 80% over the year, which puts the United States and the dollar better positioned than Europe to deal with this energy crisis.”
Like a family car carrying affluent and less affluent family members, struggling to get on, the ECB must steer and brake safely. Even when some want it to go faster, earlier.
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Although plenty of bad news is already priced in, says Vanda Research’s Viraj Patel, the amount of pressure on the euro, including bond market dread, could see it drift further afield.
Quite simply, currency markets hate uncertainty – so the euro bears the brunt of political and geopolitical economic risks. Specifically the energy here.
Running in reserve?
The scenario of things getting worse – a further escalation of the energy crisis – is still on the table.
Viraj continues, “When you have so many contradictions, forex markets only work in trend, with clear clarity.
“When the cycle goes up, when rates go up, you need all of your levers and engines with what’s causing the forex market to pull in the same direction, but unfortunately with the euro you don’t have that right now. moment. “
Previously, the dollar was weaker against most global currencies. The weakest currencies were the New Zealand dollar and the Swiss franc. The euro was trading at 1.014 around 12:45 p.m.