Euro Hit By Bets On ECB’s Policy

The European Central Bank’s President Christine Lagarde is set to deliver a speech Friday, 19 November, amid traders and investors’ speculations that the Eurozone central bank could lag behind Fed and world peers on rate hike decision.

Meanwhile, the euro touched its lowest level in 16 months this week as traders bet that the European Central Bank would stick to its policies in an attempt to contain widespread inflation which is prompting US and UK policymakers to raise interest rates.

Traders expect Fed and BoE will hike rates from historic lows over the next year at a time when the ECB is pushing back against market expectations that it too will lift borrowing costs in 2022.

The result has been a sharp decline in the Euro against the US dollar, ending a period in which currencies had largely brush aside the chaos raging in bond markets.

The market is positioning for a divergence between the Fed and the ECB. The euro sank below $1.13 on Wednesday, its weakest level since July last year and a swift decline from almost $1.16 in the middle of last week.

Although part of the euro’s recent weakness is the reverse of rally for the dollar, the single currency has also lost ground against peers benefiting from the prospect of higher interest rates.

The latest losses against sterling were triggered by data on Wednesday showing that UK inflation hit 4.2 per cent in October.

Investors, who were blindsided by the BoE’s surprise decision to keep interest rates on hold this month, are betting that UK rates will rise to 0.25 per cent in December, from 0.1 per cent currently, to tame the faster than expected price increases.

Eurozone consumer prices have also accelerated, with annual gains reaching a 13-year high of 4.1 per cent in October, according to Wednesday’s figures.

As a result, ECB president Christine Lagarde’s repeated insistence that wagers on 2022 Eurozone rate rises are not in line with the central bank’s guidance is beginning to get through to investors.

Markets are now speculating just a single 0.1 of a point rate rise in early 2023 after Lagarde told the European parliament on Monday that tightening monetary policy now would do more harm than good and conditions for a rate rise were very unlikely to be satisfied next year.

Isabel Schnabel, an ECB executive board member said Wednesday that the weaker euro would add about 0.2 to 0.3 percentage points to inflation in the bloc.

Meanwhile, the ECB is also expected to announce in December that its prize €1.85tn bond-buying programme will come to an end in March 2022.

However, investors expect the central bank to step up its longer standing asset purchase programme at the same time to support the economic recovery and limit any selloff in bond markets. The central bank has committed not to raise rates before it stops primary bond purchases.