Euro/Dollar Headwinds Rise on CEE Losses, But ECB Poses Upside Risk
- EUR/USD approaches major support near 1.1002
- Amid biggest losses since Fed policy change in 2021
- Conflict, oil price and ECB outlook weigh on EUR/USD
- But FX CEE weakness is also a significant headwind
- After heavy losses, central bank interventions were triggered
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The euro exchange rate against the dollar slipped further to a notable support level on the charts during the mid-week session as other regional currencies suffered further crushing losses that likely exacerbate the declines EUR/USD, although the decision of the European Central Bank (ECB) next Thursday could still put a floor under the single currency.
Europe’s single currency slipped below 1.11 and appeared on track for 1.1002 and the 78.6% Fibonacci retracement of its 2020 recovery trend on Wednesday, even after Eurostat figures showed that inflation rates in the euro zone jumped again in February.
Eurozone inflation rose from 5.1% to 5.8% last month, even lifting it above the 5.4% seen in the UK, while the most important basic measure of inflation rose from 2.3% to 2.7% in another sign that price pressures continued to build at the start of the new year.
But with the market uncertain about whether it will draw a response from the ECB, the data did little to help the euro, which remained under near-relentless pressure alongside Central and Eastern European (CEE) currencies. .
“We prefer an explanation of the CE3 currencies as part of a correlated risk aversion move affecting the euro complex. The Polish central bank has officially announced that it has intervened in the foreign exchange market,” says Tatha Ghose, currency and emerging markets analyst at Commerzbank.
Above: Euro to dollar exchange rate shown at weekly intervals with Fibonacci retracements of the 2020 recovery trend and displayed alongside PLN/USD.
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The Polish zloty fell more than 2% in European trading on Wednesday, taking its one-week loss to almost 7% as European currencies continued to be penalized for their proximity to the conflict in Ukraine; and more particularly those of the ECO region.
“The depreciation of the zloty observed in recent days is not consistent with the fundamentals of the Polish economy, nor with the orientation of the monetary policy of the NBP. The NBP has an adequate level of foreign exchange reserves,” the National Bank of Poland (NBP) said on Tuesday.
“The BNP is ready to react at any time to excessive fluctuations in the zloty exchange rate, which could disrupt the proper functioning of the monetary and financial markets or harm financial stability or the effectiveness of the monetary policy implemented. by the BNP,” he added.
The potential, if not probable, risk for the euro is that Tuesday’s intervention may have led the NBP to sell euros in exchange for dollars and then dollars in exchange for zloty, as that would have been the easiest way effective in combating the inflationary impact of falling Polish exchange rates.
Above: EUR/USD and PLN/USD (black), HUF/USD (green) and CZK/USD (yellow).
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The Polish central bank holds both euros and dollars in its basket of foreign exchange reserves of around $161 billion, although the bulk of goods imported into Poland come from euro-denominated economies and so it is likely that the NBP sought to lower the EUR/PLN exchange rate. Tuesday.
“Looking at yesterday’s intraday range, NBP could have defended the 4.80 level,” Commerzbank’s Ghose said.
These transactions, however, would be just one more headwind for Europe’s single currency, which has also been burdened by a series of side effects from the conflict in Ukraine, including soaring oil prices and shaken confidence. of the ECB in the economic outlook for the euro area.
“The economy is experiencing a series of imported supply shocks that drive up inflation and depress demand,” ECB executive board member Fabio Panetta said in a Tuesday webinar hosted by the Center for Economic Development. advanced studies Robert Schuman and the school of Florence. of Banking and Finance at the European University Institute.
Above: EUR/PLN displayed at weekly intervals alongside USD/PLN and EUR/USD.
“The dramatic conflict in Ukraine is now weighing on both supply and demand conditions, heightening uncertainty and heightening risks to the medium-term inflation outlook on both sides. In this environment, it would be unwise to pre-commit to future policy measures until the fallout from the current crisis becomes clearer,” Panetta also said in other remarks.
Ahead of last Thursday’s Russian military incursion into Ukraine, the outlook for the euro-dollar had improved after ECB President Christine Lagarde said inflation risks in the eurozone were rising, before to decline to reiterate an earlier view that ECB interest rates should not rise this year.
This led financial markets to become more confident in betting that the end of the era of negative interest rates could be near, although the conflict in Ukraine and its potential to disrupt economic recoveries across Europe have thrown another snowball for ECB policy makers.
Financial markets have since lowered their expectations for eurozone interest rates this year, although it is far from certain that the ECB would be willing to abandon its December plan to phase out the major part of its regular quantitative easing purchases or to be excluded from any other route. .
That could make bets against the euro-dollar rate from Wednesday’s levels a high-risk prospect ahead of next Thursday’s ECB policy meeting.