Euro consolidates losses below 1.1400 amid higher Oil prices, risk-off markets
- EUR/USD wavers between 1.1360 and 1.1400 at one-month lows.
- Brent Oil prices have jumped above $100.00, adding pressure on Eurozone economies.
- The US Dollar remains buoyed amid high US Treasury yields, strong data and Fed tightening bets.
The Euro (EUR) shows marginal losses against the US Dollar (USD) on Monday, as the rejection of the latest peace proposal in the Middle East lifted Oil prices, while the high US Treasury yields amid bets of upcoming Federal Reserve (Fed) rate hikes keep supporting the Greenback. Against this background, the EUR/USD wavers between one-month lows at 1.1360 and the 1.1400 level.
Investors’ appetite for risk remains subdued at the start of the week as US President Donald Trump rejected Tehran’s latest proposal to pause the hostilities in the Middle East and reopen the Strait of Hormuz, which leaves the region in a highly uncertain scenario.
Oil prices have picked up following the news, with the barrel of Brent Crude climbing above the psychological $100.00 barrier, boosting inflationary pressures and posing additional pressure on already strained Eurozone economies.
Strong data, Fed hiking hopes are supporting the US Dollar
The US Dollar, on the contrary, remains supported by strong US macroeconomic data and rising Treasury yields, as the return of the 10- and 30-year notes crawls higher within multi-decade highs. This has prompted central bankers to consider higher neutral rates, recalling those in the last decade of the XX century.
Analysts at Societe Generale assess that "The short-term outlook for the Dollar is certainly not negative." In their view, "energy importers remain under pressure: the Yen has yet to benefit from tighter monetary policy, and the Euro has been unable to gain support from upgrades to growth expectations."
The longer-term outlook, however, is becoming less dollar-friendly, according to Societe Generale Experts. In a two- to ten-year period, the bank expects that "US politics and evolving global savings patterns start to bite. They note that the "midterm elections may make it difficult for President Trump to maintain the accommodative fiscal policies that have supported both the economy and the Dollar," while "the world's major savings economies are saving less than they once did, while the US is having to pay more to attract the investment it needs."
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.