Connect with us
Finance Digest is a leading online platform for finance and business news, providing insights on banking, finance, technology, investing,trading, insurance, fintech, and more. The platform covers a diverse range of topics, including banking, insurance, investment, wealth management, fintech, and regulatory issues. The website publishes news, press releases, opinion and advertorials on various financial organizations, products and services which are commissioned from various Companies, Organizations, PR agencies, Bloggers etc. These commissioned articles are commercial in nature. This is not to be considered as financial advice and should be considered only for information purposes. It does not reflect the views or opinion of our website and is not to be considered an endorsement or a recommendation. We cannot guarantee the accuracy or applicability of any information provided with respect to your individual or personal circumstances. Please seek Professional advice from a qualified professional before making any financial decisions. We link to various third-party websites, affiliate sales networks, and to our advertising partners websites. When you view or click on certain links available on our articles, our partners may compensate us for displaying the content to you or make a purchase or fill a form. This will not incur any additional charges to you. To make things simpler for you to identity or distinguish advertised or sponsored articles or links, you may consider all articles or links hosted on our site as a commercial article placement. We will not be responsible for any loss you may suffer as a result of any omission or inaccuracy on the website.

NEWS

Analysis-Recovering euro keeps dollar ‘gorilla’ from scuppering ECB rate outlook

Analysis-Recovering euro keeps dollar ‘gorilla’ from scuppering ECB rate outlook

By Amanda Cooper and Stefano Rebaudo

LONDON/MILAN (Reuters) – The euro has resisted falling to parity with the dollar for now, thanks to a rosier economic backdrop, to the relief of European Central Bank policymakers who could be struggling to detach themselves from the Federal Reserve’s monetary policy outlook.

Just a month ago, the euro’s fall to five-month lows prompted some talk among analysts about a return to parity against the dollar as the fragility of the euro zone contrasted with a resilient U.S. economy that boosted the dollar and prompted investors to dial back Federal Reserve rate cut bets.

Lower euro area interest rates than those in the United States remain a headwind, but the euro seems on a stronger footing thanks in part to an improving macro backdrop.

The most recent round of purchasing manager surveys, for example, showed business activity in the euro zone expanded at a faster clip than that in the United States in April for the first time in a year.

That has helped the euro recover roughly 1.7% from April’s lows to around $1.0708.

“We’re starting to see that divergence between economic performance close, offering some help to the euro,” said Fiona Cincotta, market strategist at City Index.

“That is also a cause for relief for the ECB and a reason for them to be more relaxed as well. It’s almost as if their ducks have lined up quite nicely so far.”

Citi’s economic surprise index for the euro zone has trended lower in recent weeks, but at 27, is comfortably in positive territory, as business activity and growth improve. In contrast, the U.S. index has fallen below zero for the first time since early 2023, as crucial data such as growth and employment have missed expectations.

On a trade-weighted basis, the euro is up 0.5% this year and not far from 2023’s record highs. A lot of this is down to weakness in the likes of the Chinese yuan and Japanese yen.

That offers a less negative picture on the euro than purely looking through the lens of the dollar in that it neutralises some imported inflation.

GORILLA IN THE ROOM

Still, a sustained drop in the euro could boost import prices and rekindle inflation, thereby limiting the ECB’s scope to cut rates.

The euro has lost around 2.5% against the dollar this year and the ECB, which does not target an exchange rate, cannot easily ignore more weakness.

“To a certain extent, our data and decisions are naturally influenced by the Fed. We are not working in a vacuum. With the dollar, the Fed is, figuratively speaking, the gorilla in the room,” Austrian central bank Governor Robert Holzmann told Handelsblatt in an interview published on May 8.

Other factors such as a spike in the oil price, or a deterioration in geopolitical tensions could undermine the euro area by again hurting the growth outlook and magnifying the inflationary effect of a weaker currency.

Right now, markets show traders believe the ECB will deliver three quarter-point cuts, bringing the benchmark rate to around 3.25% by year end. The Fed is expected to cut just twice, to a range of 4.75-5.25%, leaving the premium of U.S. rates over euro zone ones at 175 basis points.

Some analysts think three cuts from the ECB and no cuts from the Fed this year, bringing the gap to 213 bps, might tip the euro back to parity, which could sound alarm bells at the ECB if currency weakness threatens to fuel inflation.

The euro last hit parity around August 2022, when the rate gap between the two central bank rates was 238 bps.

“If the market prices out Fed rate cuts for this year and pushes the cuts later into next year and the ECB pricing remains at the current levels, parity becomes a possibility and such a move would be enough to make the ECB delay its easing cycle,” Athanasios Vamvakidis, global head of G10 forex research at BofA, said.

Neil Mehta, a portfolio manager at BlueBay Asset Management, said the currency market was where the divergence in interest rates would play out most clearly, with the dollar emerging as the likely winner, with parity for the euro, a possibility.

“It’s not the base case, but we certainly see the risks tilted in that direction. We think the first step is $1.05,” he said.

 

(Additional reporting by Yoruk Bahceli in Amsterdam; Editing by Dhara Ranasinghe and Emelia Sithole-Matarise)

Continue Reading

Why pay for news and opinions when you can get them for free?

       Subscribe for free now!


By submitting this form, you are consenting to receive marketing emails from: . You can revoke your consent to receive emails at any time by using the SafeUnsubscribe® link, found at the bottom of every email. Emails are serviced by Constant Contact

Recent Posts