Euro: Rising inflation risks threaten resilience - Commerzbank

Commerzbank’s Thu Lan Nguyen notes that EUR/USD has remained relatively stable as both the Euro and US Dollar have weakened broadly against other currencies. However, rising oil prices and stronger Euro-area inflation expectations pose downside risks, while demand for German bonds helps explain why French fiscal concerns have not exerted greater pressure on the currency.

Euro resilience faces inflation and fiscal risks

"A look at our currency indices, however, shows that both currencies have indeed moved, namely lower. But as the euro and the dollar have weakened broadly in tandem, EUR/USD has remained relatively stable."

"Higher oil prices in particular should put greater pressure on the euro, as their impact on both inflation and economic activity in the euro area is more pronounced and, on balance, negative for the currency."

"At the same time, short-term inflation expectations have risen more strongly in the euro area than in the US. In other words, higher inflation expectations are currently not being offset by a corresponding shift in relative interest-rate expectations. This is, in principle, a negative signal for the euro."

"German government bond yields fell noticeably last week. This suggests that many investors simply sold French government bonds and bought Bunds instead. Such a portfolio shift within the euro area does not require investors to change their EUR exposure and therefore does not necessarily have an impact on the exchange rate."

"Against this backdrop, it is hardly surprising that the euro has so far not come under greater pressure, at least against the US dollar. But as we already saw at the end of September, sentiment in the euro area can turn quickly. So it is far too early to sound the all clear..."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)