Anatoli Annenkov of Société Générale notes that threats to the Eurozone's "soft landing" economic outlook loom over the horizon, as well as upside risks to inflation.
On Our Minds: Euro Area
Having mainly used the short-term policy rate to tighten policy, the increases seen at the long end of the yield curve since the last meeting seem increasingly important for the ECB... the ECB should be on hold for now until clearer visibility emerges over the outlook, possibly not before March next year.
Last month, the ECB surprised us by suggesting that no further rate hikes might be needed, even before a clear turnaround in core inflation and without having a defined tool to communicate an expected rate path... We have long been concerned about the limited transmission of tighter policy to the long end of the yield curve, supported by tepid QT.
Long-term bond yields continued to rise after the September meeting. The Bund was up by nearly 40bp until early October, driven by a combination of a supply/demand mismatch, inflation concerns and fears of ‘higher-for-longer’.
The rise, and risk of further increases, in long-term yields is likely to quell calls for more policy tightening in the near term. Moreover, data have mostly supported the planned pause in tightening.
The next set of data on the state of the economy will only be available after the October meeting (full set of 3Q GDP by early December) and with core inflation widely expected to continue moderating this autumn, the March ECB staff projections next year may be the next best time to assess the outlook.
The ECB has generally downplayed QT as a tool for fighting inflation but as policy normalises, we see slightly higher QT flows next spring (ending full reinvestments of the PEPP), after the review of the operational framework.
Moreover, to dampen the political backlash from rising losses over the coming years, we suspect that the ECB may agree to raise the minimum reserve requirement next year, with the impact on overnight rates determining by how much. Even with that, mounting losses will be a political/public image challenge for the ECB for some years.
Note: All information on this page is subject to change. The use of this website constitutes acceptance of our user agreement. Please read our privacy policy and legal disclaimer. Opinions expressed at FXstreet.com are those of the individual authors and do not necessarily represent the opinion of FXstreet.com or its management. Risk Disclosure: Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.
Recommended content
Editors’ Picks
EUR/USD stabilizes near 1.0500, looks to post weekly losses
EUR/USD extended its daily decline toward 1.0500 in the second half of the American session, pressured by the souring market mood. Despite the bullish action seen earlier in the week, the pair remains on track to register weekly losses.
GBP/USD falls below 1.2150 as USD rebounds
Following an earlier recovery attempt, GBP/USD turned south and declined below 1.2100 in the second half of the day on Friday. The negative shift seen in risk mood amid rising geopolitical tensions helps the US Dollar outperform its rivals and hurts the pair.
Gold advances to fresh multi-week highs above $1,920
Gold extended its daily rally and climbed above $1,920 for the first time in over two weeks on Friday. Escalating geopolitical tensions ahead of the weekend weigh on T-bond yields and provide a boost to XAU/USD, which remains on track to gain nearly 5% this week.
Bitcoin could be an alternative to US-listed companies but not in the short term
Bitcoin has dipped below $27,000, adding to the subdued cryptocurrency market sentiment. While short-term price concerns persist, analysts predict a rebound based on historical figures.
Nvidia Stock Forecast: NVDA slips as Biden administration attempts to close AI chip loophole
Nvida's stock price opened marginally lower on Friday after Reuters reported that the Biden administration is attempting to close a loophole that allowed Chinese companies access to state-of-the-art computer chips used for AI.