Q2 Euro Fundamentals
The Euro is the currency of 20 individual countries within Europe – this brings a lot of variables which need to be factored in as well as a lot of data releases. Thankfully, by focusing on the four biggest of Germany, France, Italy and Spain we are able to extrapolate the outlook and potential price moves, there is also a EUR overall figure released, but this is less timely than the individual major countries.
The ECB has moved rapidly from a period of interest rates of 0% or below to 3.5% by hiking 6 meetings in a row. The ECB have been relatively hawkish despite expectations that the Peak rate is near. The next meeting is 4th May, where the early expectation is that the ECB will hike again – however the same banking issues which hit the US have also hit in Europe. This is one major risk factor which could completely alter the rate path and Euro strength.
Inflation is the major issue within the Eurozone, with comments from ECB members stating that if inflation remains above 4% then we should expect rate hikes. Credibility is something that the ECB has been trying to both protect and project, therefore comments like this should be listened to.
Euro Inflation figures are due to be released 2 days before the next ECB meeting, however the key components of this are released the week before and will likely play a major role in the outcome of the meeting the week later. But there are clues such as the breakdown of the Flash PMIs as these surveys contain a prices component. Although this is soft data it can hint at what the hard data may show.
On the geopolitical front, the war in Ukraine is a major source of underlying risk, although it has been ongoing for over a year, any escalation in this could see major flows out of Europe. Similarly, any resolution could see major stimulus for the Euro. The rebuilding of Ukraine will likely significantly boost the German, Polish and other Eurozone economies – this would likely cause money to flow into Europe. With OPEC cutting output, there will be a short lag on this filtering into prices, but it is expected that this will negatively impact inflation within the eurozone – this will be further exacerbated by the removal of cheap Russian energy coming into the market.
Overall, inflation and the aim to bring inflation back down to the ECBs target is front and centre so watching the inflation numbers will be key – the likelihood is that the ECB will raise rates, with some members of the ECB sounding quite hawkish and calling for up to 50bps in May – how likely hikes of this size are will certainly be up for debate, but as long as inflation pressures remain and until we see inflation noticeably coming back towards target, the ECB will likely continue hiking.