EUR: The return of the 'S' word
Very quietly we are seeing the return of the term 'stagflation' to describe prospects for the eurozone economy. The European Central Bank (ECB) is finally acknowledging that growth is going to be a lot weaker than their official forecasts while core inflation remains sticky above 5%. We think the ECB will push ahead with their final 25bp hike at their September meeting, but many think this will be a mistake.
In the background, eurozone politicians are still debating a return to Maastricht debt and budget deficit criteria, which had been suspended during the pandemic. While this may be good for eurozone government bond markets, its impact on the euro (tighter fiscal, less tight monetary policy) would be negative.
We do not see any range-breaking eurozone data on the agenda this week. However, there are plenty of ECB speakers jostling for position over the final 25bp hike in September. EUR/USD is looking fragile and while it may not go anywhere today, a speculative market that is still long EUR/USD might have to cut positions if modest support levels at 1.0760/85 give way. Intra-day resistance may be found at 1.0820.
Chris Turner
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