Euro: Debt contagion fears weigh on EUR against US Dollar – Societe Generale

Societe Generale strategists highlight renewed Euro (EUR) weakness as widening European spreads and US Dollar (USD) demand push EUR/USD below 1.12, far from the European Central Bank's (ECB) technical assumption of 1.16 for 2026-28. They stress that currency depreciation complicates the inflation outlook and could trigger ECB debate on uneven policy transmission, with speculative positioning now short Euro futures.

Debt spreads and Dollar demand pressure

"Fear of contagion across European debt markets drove the euro lower across the board on Friday and it’s a similar picture that emerges this morning, with rising yields and the tightening in the XCCY spread (dollar demand) driving EUR/USD below 1.12 to the lowest levels since May 2025."

"The depreciation of the currency will only complicate the inflation landscape for the ECB and the widening in spreads could become a headache, prompting debate about uneven transmission of monetary policy and the non-standard tools to narrow the divergence."

"The currency is deviating further away from the technical assumption of 1.16 for 2026-28 and implies higher inflation all else being equal on growth and energy prices."

"How long before ECB speakers publicly come out in support of the single currency and try to slow the pace of decline?"

"With oil and natural gas prices staying elevated, the pass through of the currency will squeeze industrial companies and erode real disposable income for households."

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