Xinhua Finance, Beijing, May 24 (Wang Shurui) Since the beginning of the year, the euro against the U.S. dollar has continued to fluctuate downwards. In mid-May, it once fell below 1.04, the lowest level in more than five years. Recently, European officials have continued to "hawk" rebounded under the support. Institutions generally expect the euro to trade within the range of 1.0-1.2 against the U.S. dollar during the year. However, as there are more and more signals of economic recession in the Eurozone, some institutions are beginning to expect the euro to fall to parity against the U.S. dollar. Based on the current market sentiment, It seems difficult for the euro to escape from the bottom of the range, and a short-term recovery will become an opportunity for short sellers to continue to exert force.
Since the May meeting, almost all public ECB officials have supported the ECB starting to raise interest rates in the summer, which would be the ECB's first rate increase in more than a decade. Policymakers at the central bank have been making the case for higher interest rates at a time when inflation in the euro zone is at record highs and is becoming increasingly common. ECB President Christine Lagarde made this point clear again in an article on Monday. Lagarde published an article titled "Normalization of Monetary Policy in the Eurozone" on the official website of the European Central Bank, in which she clearly stated that the European Central Bank will decide to raise interest rates at its monetary policy meeting in July this year.
Lagarde introduced in the article that the economic and financial environment faced by the Eurozone has undergone major changes. On the one hand, high energy prices have caused high inflation, and at the same time, sluggish consumption and investment have also made the prospects for economic recovery in the Eurozone uncertain. Against this complex background, the European Central Bank's monetary policy needs to remain progressive, optional and flexible. This article reinforced market expectations that the central bank will start raising interest rates in July, and the euro rose to 1.0697 against the dollar, the highest since April 26. The euro was also supported by Germany's Ifo survey, which showed the country's economy remains resilient amid soaring inflation.
The market currently predicts that the European Central Bank will raise interest rates by 110 basis points this year, which means that the rate hike will exceed 25 basis points at every policy meeting starting in July. Expectations of interest rate hikes will undoubtedly support the euro. However, the market does not believe that the economic outlook of the euro area is suitable to be described as "uncertain" in Lagarde's words. More and more people believe that the euro area will move into recession. This expectation will continue in the coming period. time limit for the euro's rise.
The European Commission has significantly lowered its 2022 growth forecast for the euro zone, from 4% forecast in February this year to 2.7%. The European Commission also predicts that the inflation rate in the euro area will be as high as 6.1% this year, which is also much higher than the previous forecast of 3.5%. Data show that due to the surge in imports and the impact of falling external demand on exports, the euro zone's merchandise trade deficit recorded 16.4 billion euros in March, the highest on record, and the trade situation continues to deteriorate. Philip Lane, chief economist of the European Central Bank, said in a speech recently that "because the euro area is dependent on oil and gas imports, this will have a significant adverse impact on the terms of trade and reduce the area's real aggregate income."
Citigroup Group chief executive Jane Fraser said she was convinced Europe was headed for recession. She told the World Economic Forum on Monday that "Europe is at the center of the supply chain and energy crisis storm."
Morgan Stanley expects that as Europe faces slowing growth, geopolitical uncertainty and high inflation, it will seriously affect consumption. Although the European Central Bank is about to begin an interest rate hike cycle, policy normalization will be gradual, as weak growth prospects will lead to a pause in further interest rate hikes after the deposit rate rises to 0%.
Amundi, Europe's largest asset manager, believes the growing threat of a recession in Europe will prevent the European Central Bank from raising interest rates above zero. Vincent Mortier, chief investment officer of Amundi, said that the market has overestimated the European Central Bank, and that the economic downturn and rising borrowing costs for some of the more indebted members of the euro zone will prevent the European Central Bank from raising interest rates. Later this year, the ECB will only raise interest rates twice, by 25 basis points each, from the current record low of -0.5%, and then stop raising rates.
Mortier predicts that the European Central Bank will prioritize controlling government borrowing costs over fighting inflation, a decision that will further lag the European Central Bank behind the Federal Reserve in fighting inflation and send the euro against the dollar to 1.
Technically, Wells Fargo’s Erik Nelson wrote in a report on Monday that the euro against the dollar is approaching the bottom of the trendline channel formed by the highs hit in January and September 2021 and the low hit in April this year. To return to this channel, EURUSD needs to effectively break above 1.0665, which will provide support for the euro.
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