This comes at the worst possible time for the eurozone, and in many ways is of interest to the eurozone. This will accelerate inflation, already soaring to 9%, as it will make imports more expensive and possibly cause energy prices to skyrocket. In short, this means even more hardship for European households and European businesses, who are already groaning under the weight of punctuality and are now clearly worried about winter. And, of course, this puts the ECB in an even more difficult position and poses even sharper dilemmas as it dictates an aggressive rate hike, perhaps more aggressive than its plans for September predicted and, above all, more aggressive than the eurozone can handle. without plunging into recession.

The aggressive policy of the Fed is a key factor in the depreciation of the euro against the dollar, exacerbating the dilemmas of the ECB.

The reason is the continued fall of the euro, which has fallen by about 12% against the dollar since the beginning of the year. Initially, its decline was the result of an upward trajectory taken by the US currency, when the markets did not take into account the decisive increase in interest rates by the US Federal Bank and, of course, when the Federal Reserve confirmed expectations. However, since last month, and especially in the last few days, it has been falling below one dollar, only to return to one dollar a day or a few hours later and again and again. This accelerated fall in the euro is in large part due to heightened fears about the number one risk threatening European economies in recent months, if not last year: a total shutdown of gas supplies from an unnerving Moscow as Europeans turn pipeline taps on and off. . And, of course, this is due to growing concern about the risk of the Eurozone sliding into recession, when European factories reduce or completely stop their activities, production will be limited, and with it exports, when gas and electricity will be rationed, energy and when accuracy will crush the consumption of European households.

What worries me most is that the factors that are choking the single currency will not abate. Consequently, the forecasts are ominous to say the least, as they all point to a further and inevitable weakening of the single currency. Economists at JP Morgan predict a further fall in the euro to $0.95 by the end of the year, investment Nomura International similarly, but notes a new fall even earlier, at the end of September, when, according to its estimates, the euro will fall to $0.975. Stanley is talking about pulling back to $0.97 before the end of the quarter. And worst of all, most economists believe that the ECB’s ability to intervene to support the currency is very limited.

The ECB is concerned, but does not interfere in the exchange rate

The ECB’s usual tactic is to avoid commenting on the euro exchange rate, at least publicly, although its leaders have occasionally stressed that the Bank’s goal is not to determine the euro’s exchange rate. However, in recent months, amid a deepening energy crisis and accelerating inflation, some of its leaders have openly expressed their concerns. However, the common denominator of concern was the impact that a weakening currency would have on inflationary pressures. However, again, the Bank does not seem to include euro parity in its agenda of how strongly it should move from now on with regard to interest rates.

The prevailing opinion among economists is that the ECB’s next steps, that is, the expected increase in interest rates, no matter how aggressive they may be, will not significantly affect the euro exchange rate. As most economists point out, the euro exchange rate was determined by geopolitical factors, as well as by the actions of the US central bank, which, by increasing its interest rates, pushed the dollar higher. According to Sam Ziff, head of foreign exchange strategy at JP Morgan Private Bank, in recent months, changes in the foreign exchange markets were not determined by changes in interest rates. Commenting on the fluctuations of the euro, he recently stressed that the currency is not supported by higher interest rates, no matter how large, when the goal is to contain inflationary pressures and cool the economy. Dirk Schumacher, an economist at Natixis, also notes that an increase in interest rates cannot support the currency without at least a small positive development in the economy. Therefore, according to his estimates, even if the ECB decides to continue raising interest rates by 75 basis points in September, and not by 50 basis points. or even shorter, “little will change in the euro.

Even those who consider such an aggressive increase in euro interest rates appropriate do not see this as a help for the single currency. Earlier this week, as the euro fell below one-for-one parity against the dollar, Commerzbank economist Gerg Cramer noted that a 75 bp rate hike this would be a very good idea in terms of curbing inflation, but it won’t affect the euro.

Interest rate hike expected by 75 basis points despite recession fears

Regardless of how much this will or will not affect the euro, it looks like the ECB will now decide to raise interest rates aggressively by 75 basis points. Citing sources at the bank who asked not to be named, Reuters reported at the end of the week that many ECB leaders are asking to discuss this prospect at the September meeting. The news came as a bit of a surprise, but as one source pointed out, if the Fed did it, why should the ECB rule it out? Theoretically, the deterrent is the reaction of the countries of the European South, including Greece. The bitter truth is that the Eurozone has long been flirting with a recession, and the ECB is risking far more than the Fed. After all, the superpower may risk more because it is not facing an energy crisis as severe as the one that has affected Europe, which has depended on Russian hydrocarbons for decades.

At the same time, however, the ECB does not have much room to maneuver, and it is possible that the need for an aggressive increase in interest rates will soon become imperative, also for the sake of euro parity. The difference between the interest rates of the dollar and the euro is one of the factors leading to the strengthening of the dollar. Following successive increases in recent months by the US Federal Reserve Bank, dollar interest rates have reached a range of 2.25% to 2.5%, while the ECB has risen to just 0.5%.

Economists and analysts point out, therefore, that as long as the ECB hesitates, the Fed’s restrictive policy will strengthen the dollar at the expense of the euro. Especially now that, as Fed Chairman Jerome Powell pointed out on Friday, the US Federal Reserve is determined to continue its policy of aggressively raising interest rates until it manages to tame the inflationary beast. Meanwhile, the minutes of the July meeting made many ECB officials worried about the consequences of the devaluation of the euro.

At the same time, however, the Bank mentions in its estimates that “if the US economy slides into recession, and it seems to be in danger, the euro will rise in price.” However, he did not fail to emphasize that in the event of a recession in the US, there will be side effects, and the worst of them could be a worsening global climate, which will push investors back to the dollar and lead to its strengthening. After all, there were voices that emphasized that the eurozone has so far demonstrated remarkable resilience to the blows of alternating crises.

Worry

Clearly worried, Bank of France Governor Villeroy de Gallo has been warning since May that the Bank has been keeping a close eye on the euro exchange rate as “a fall could undermine its efforts to bring inflation back to its 2% target.”

Interest rate hike

Having already warned that the retreat of the euro could lead to a further acceleration of inflation, Isabelle Schnabel, a member of the board of directors. The ECB last week advocated a new euro rate hike in September, as aggressive as it was in July.

Misreading

Responding to the argument that a weaker euro would spur European exports, Economy Commissioner Paolo Gentiloni recently stressed that “it would be a mistake to think of a declining currency in such terms, even if export activity should be boosted.”