Despite having , the euro flirts with multi-year lows in its exchange rate with the US dollar, despite the aggressive tone of the June meeting.
This is probably due to a lack of news regarding credible support as monetary policy tightens. The fact is that the ad hoc meeting of the to discuss how to stabilize these costs suggests that the differentials of profitability to maturity of the debt of peripheral countries are close to the acceptable pain threshold and that it is probable that . The credibility of the government to address debt fragmentation may be tested, but we believe the scheme will be robust and serve to quell concerns quickly.
The fact is that to be fair, most of the devaluation of the euro is linked to the appreciation of the dollar, since the strong inflation in has increased the forecast of rises in interest rates of the . This tightening has weighed on risk asset prices and supported the dollar as an increasingly profitable safe haven. However, the European Central Bank also .
In fact, the interest rate and growth differentials between and the eurozone should be reduced, which should favor the euro. At the moment the market’s expectations are for , both in the eurozone and in 2022. But for 2023 the market expects the rate to increase by only 0.1% net and 1% by the ECB.
However, the expectations of a significant monetary tightening in the eurozone in 2023 are unlikely, given that at the same time interest rate cuts are discounted by the next financial year.
A sharp slowdown in developed economies may keep the dollar strong, but expectations of interest rate cuts next year in the US may support global risk appetite and reduce the value of the dollar. In addition, and the new credible mechanism to avoid debt fragmentation in the region may lead to a significant improvement in net capital inflows into European debt, which favors the euro.
We must also take into account the high and sustained increase in energy prices, which may translate into higher costs and affect the economic outlook for the euro area, limiting the monetary adjustment of the ECB, which, together with a deterioration in the balance trade, may affect the euro exchange rate downwards.
In fact, the increase in prices of energy imports with the war in Ukraine and the drop in economic activity in China due to the blockades generated by the policy of , have affected the euro.
At the moment, it reduces concerns about supply chain interruptions, although the eurozone economy is facing increases in natural gas prices due to supply interruptions from the US (a major terminal will be out of operation for at least three months) and Russian movements to reduce the supply of gas to some countries of the Old Continent.
As a result, we remain neutral on the short-term euro exchange rate, expecting it to move to $1.06 in three months. In addition, we maintain our projections for the appreciation of the euro in 6 and 12 months, up to 1.11 and 1.15, respectively.
The main risk for this forecast is a sustained increase in gas prices and difficulties in increasing gas inventories in the eurozone before next winter. Other major risks are a failure of the European Central Bank to create a credible anti-debt fragmentation tool or that US inflation is persistent and causes the Federal Reserve to continue to focus on price stability.