BNY’s Head of Markets Macro Strategy Bob Savage reports that Eurozone data and European Central Bank (ECB) commentary point to rising downside risks for the Euro as the Iran war and energy shock weigh on growth and sentiment. ECB officials Radev and Wunsch warn that the euro-area outlook may be deteriorating and that rate hikes could start as soon as April if second-round inflation effects intensify.
Energy shock and weak sentiment hit Euro
“The EUR continues to lead underperformance among the major currencies, followed by outflows from other relatively low-yielders such as the JPY, SEK and NZD.”
“ECB Governing Council member Dimitar Radev warned that the euro-area outlook may be deteriorating more than previously expected, citing rising risks from the Iran war and associated energy shock. He said the likelihood of a more adverse scenario has increased, with heightened uncertainty and stronger transmission of shocks to inflation expectations potentially accelerating price pressures.”
“Radev cautioned that if the shock begins to feed into wages, margins and expectations, the cost of inaction would rise, making a timely policy response more appropriate. However, he noted it is still too early to determine whether sufficient data will be available for the ECB to take a clear decision at its April meeting.”
“While the ECB cannot control energy prices directly, Wunsch stressed the need to act to contain spillovers into core inflation, noting policymakers were too slow to respond in 2022. He added that future decisions remain data-dependent, with outcomes hinging on the duration of the crisis and its impact on inflation dynamics.”
“ECB Governing Council member Pierre Wunsch said the central bank may need to begin raising interest rates as soon as April and potentially continue tightening if the energy shock from the Middle East conflict persists. He highlighted rising risks of second-round effects, with sustained high energy prices feeding into wages and broader inflation, which has already increased to 2.5% in March and could rise further.”
(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)
Source: https://www.fxstreet.com/news/eur-war-shock-clouds-ecb-outlook-bny-202604071420
