“The European Emperor has no clothes” has never been more true at any point in history than it is today.
The EU is hard at work to revolutionise the energy power regulations to afford some relief to consumers and businesses alike.
At the very same time, the European Central Bank is considering 75-point rate hikes.
What one hand gives the other takes away. To be fair, rates in Europe do need to rise.
Inflation is very real and growing. German inflation hit 7.9% yesterday. And a quick look at a 25-year chart brings home the magnitude of the issues here.
The ECB will be raising interest rates significantly, but is this a reason to buy the EUR/USD cross?
The situations of Europe and the USA are very different now. Based merely on the fact of war in Europe. There is no quick fix outcome for a conflict that is entrenched. The economic consequences for Europe are complex but tend heavily to the negative.
There have been supply disruptions in food and energy, both due to the conflict and to the sanctions applied. All of this has discouraged shipping companies to some degree as well.
Much is being done to alleviate the immediate and clear energy challenges facing Europe.
The USA has said it will work to fill the energy gap. The truth is that even at best efforts the USA will only be able to make up about 20% of the energy supply loss from Russia. The EU continues to work urgently to diversify its energy supply further.
All of this takes significant time and probably a lot longer than will even be planned for.
In the meantime, fast entrenched inflation across all services and goods will only add to the misery of potential energy shortages through the winter period. Across the channel, the UK is again looking to develop fossil fuel resources in the North Sea.
The challenges for the EU are even greater. Germany has already directed limitations on energy use in businesses. It will get much worse.
EU consumer and business sentiment indicators remain recessionary. Given the circumstances, this is highly appropriate, as a Recession, possibly a “Dark Recession” is very much on the cards. Likely through winter and possibly beyond.
We have seen a general financial market interest rate outlook fixation develop of late, particularly in US equity markets.
Where traders and investors attempt to dumb down the world into a single make or break criteria. That being the Fed’s actions. Every economy is of course far more complex than this.
However, this style of sentiment was very much prevalent on the day in Euro trading as expectations of more aggressive ECB rate hikes to come were encouraged. Subsequently, the EURUSD has certainly stabilised for the moment at least.
The price action characteristics are of a market attempting to reject the sub-parity movement. It is normal for markets to become trapped for a time around nice round numbers in their pricing, but their importance is highly illusionary.
The reality is the Euro has been far lower than this before.
Expectations of a more aggressive ECB, may well be founded and generate significant buying in the short term. Over the medium to long term however, with a wintery dark recession risk fast approaching and a still safe-haven strengthening of the US dollar, the most likely scenario is for the major downtrend in the Euro to resume.
Having recently adjusted my long-held Euro target of .97 for this year, down to .9200, I continue to see further risk. After some initial ECB hike buying, people will remember the remaining huge and still growing differential to the US dollar.
The Fed is likely to continue to outpace the ECB in this regard. There is in fact no reason why the Euro cannot fall as low as .8800.
For the moment, the market seems trapped in a 0.9900 1.0110 range and wants to test the upside toward 1.0200. However, even a break below immediate support at .9970, would be a significant warning.
Market insights and analysis from Clifford Bennett, Chief Economist at ACY Securities
