The fourth wave of Covid-19 and the uncertainty of the European Central Bank (ECB) are putting the euro under pressure. The single currency of the eurozone is at its lowest against the dollar, at 1.13. Never so bad since July 2020. Various factors have an impact. From the raw materials crisis, with Europe more exposed than the United States, to the resurgence of infections from Sars-Cov-2, with the consequence of new lockdowns. Without forgetting the most important element, Frankfurt’s hesitation against inflation, which continues to rise. Now the markets are waiting for answers from Christine Lagarde.
A dangerous divergence, that between the US and Europe. With strong repercussions on the euro for the European currency. An example. Solita Marcelli, head of US investments of the Swiss bank UBS, sees the first rate hike in the US in 2022. Hypothesis confirmed by Massimo De Palma, head of Gam’s Multi Asset team, who expects three increases in the next year. Conversely, most analysts do not see the same for the ECB. An aspect that is leading Frankfurt to lose credibility with investment fund managers. On 30 November Eurostat will publish flash estimates on euro area inflation for the current month. The next day the Eurosystem bankers will meet in Frankfurt and then on 16 December there will be the final decision. That is, whether to continue with the current line or to follow the indications of the Fed. To date, there is no certainty. And precisely in the face of this unclear climate, investors believe that there is a wrong approach by the ECB. It is being priced, in other words, that Lagarde does not have the pulse of the situation.
Filippo Diodovich, senior market strategist of IG Italia, confirms the sentiment of the financial markets. Which speaks of a conjunction that could be negative in the short term. “We believe the ECB is underestimating the risks to inflation,” he explains. The euro, says Diodovich, “is under pressure because the market is pricing in that the Federal Reserve will become less and less accommodative in the coming months and will prepare for a rate hike while the ECB will maintain its wait-and-see stance.” An attitude, that of Frankfurt, which could undermine the credibility of the ECB in the first place and then the euro. Especially because the movements underway cannot be underestimated, although they are currently in the minority. As De Palma points out, “the German“ hawks ”are ready to request a change in monetary policy, useful for countering the overheating of prices. This position at the moment appears to be completely minority and therefore it is unlikely that it will change the line defined in the last meetings of the ECB ”. However, all eyes are on Lagarde, who is called for definitive answers by the end of the year.
Another element to take into consideration are China’s decisions on the energy front. At the urging of the US administration, Beijing is considering whether to release part of the strategic crude oil reserves. Factor that has allowed a retracement of the price of oil, which fell below 80 dollars per barrel, and which could ease the pressure on the euro area, thanks to a lighter energy bill.