Tommy Wilkes and Dhara Ranasinghe
LONDON (Reuters) – The deepening energy crisis has hit the euro zone economy and its currency so hard that Europe has resorted to more aggressive monetary tightening Policy central banks have done little to stop the euro’s slide.
EUR fell below $0 on Monday. 80 For the first time since late 2002 stopped passing in Russia The main pipeline to supply natural gas to Europe sent energy prices soaring and exacerbated the supply crunch.
Currency weakness will be the focus and center of Thursday’s ECB meeting as euro weakness – down 10% in 2022 – potentially making already record high inflation worse by making more expensive imports.
Weak euro exacerbates ECB inflation problems https://fingfx.thomsonreuters.com/gfx/mkt/myvmnzggdpr/euro2.PNG
Some policymakers say banks must focus more on the euro than in earlier periods of weakness, as gas is denominated in dollars, and a weak euro amplifies the surge in energy costs influences.
The currency market price has a 80% chance to appear oversized The basis point rate was raised this week, but analysts see little help for the currency.
“This big rate hike will not help the euro. A recession is coming and geopolitical concerns are out of control,” said Agnès Belaisch, strategist at Barings Investment Institute. “Indeed, there is a high probability that rising interest rates will coincide with inflation and a recession 2023.”
Goldman Sachs (NYSE) :
GS) The euro is forecast to weaken to $0 on Monday. 80 and remain there for the next six months as demand destruction from the gas crisis will lead to a “deeper, longer contraction” “.
Capital Economics revised its forecast to $0. 80 Next year – down 9% from current levels.
For several months, the euro has had a negative correlation with gasoline prices, which means that when energy prices rise, it tends to fall. 2022 gasoline prices soared by 80% on Monday 40%.
Recession Watch
The euro zone is almost certain to enter a recession, with business activity contracting for the second straight month in August.
The energy shock is taking its toll, and data suggests speculators have ramped up their bets on the currency.
EUR short position is being opened https://fingfx.thomsonreuters.com/gfx/mkt/xmvjoallapr/euro1.PNG
UniCredit estimates five years prior to the COVID-19 pandemic , the EU imports oil and gas worth about 400 one billion euros per year.
If oil prices remain at 80 dollars per barrel, euro parity, and natural gas prices remain at 100 EUR – five times the average over the past five years – costs will jump to 600 billion euros, or 6% of GDP, according to UniCredit’s Erik Nielsen.
Economists and currency analysts believe the economic pain will be worse than expected a few months ago.
“The narrative for the euro zone is changing. A few months ago it was: “There will be no recession. “Recently it turned: “There will be a recession, but it will be shallow,” Robin Brooks, chief economist at the Institute of International Finance, tweeted on Monday (NYSE: TWTR) said. “This weekend we are starting to make the final turn: “We are heading for a deep recession.” The euro will fall further.
However, some say the ECB can at least stop the depreciation of the euro by raising interest rates sharply in the coming months.
” The ECB can be said to help slow down The euro is weak, but it’s unclear if it can lead to a sustainable appreciation of the euro,” said George Saravelos, global head of foreign exchange research at .Deutsche Bank (ETR: DBKGn).
Inflation Pain
The euro has fallen far less than against the dollar against other currencies, and the pound has not been supported by rising expectations for more aggressive rate hikes.
The European Central Bank followed suit last month The trade-weighted index fell to its lowest point since February 2002, but was lower throughout and 2016 No ECB intervention.
The fall in the euro also has less of an impact on inflation Patrick Sana, head of macro strategy at Swiss Re (Patrick Saner) said, as many people think. He cited official data to show that because of the decline in the nominal effective exchange rate of the euro 13% will lead to an increase in consumers 40-255 price inflation basis points a year from now.
But as Saner points out, “even marginal effects are currently Not exactly ideal”.
Inflation is energy driven prices, so European producer prices soar.
Deutsche The bank’s Saravelos noted that the euro effective exchange rate based on consumer price inflation is near record lows, but the producer price based index is near record highs.
This means the competitiveness of the euro area Rapidly weakening – terms of trade shocks will further damage the economy.
