The EUR/USD exchange rate has remained
relatively stable following the European Central Bank’s (ECB) recent policy
announcement, which closely resembled the statement from September.
Notably,
there was no dialogue regarding potential changes to the minimum reserve policy
or adjustments to the current Pandemic Emergency Purchase Program (PEPP)
guidance, which currently commits to reinvesting maturing securities through
the end of the next year. Furthermore, there was no explicit or implicit
criticism of Italy’s recent fiscal policy changes, which have put upward
pressure on the BTP/Bund spread.
The ECB’s
reluctance to address these issues might indicate concerns about the state of
the real economy and hesitance to exacerbate the impact of previous tightening
measures that had a strong effect on financial conditions.
President
Lagarde also seemed hesitant to emphasize the extent of economic weakness,
possibly out of a fear of prematurely fuelling expectations of interest rate
cuts. Lagarde described the Purchasing Managers’ Index (PMI) data as indicating “less robust growth,” which is, in all honesty, an understatement.
The Bank Lending Survey data was also cited as evidence of the transmission of
monetary policy, with a notable decline in demand for loans from enterprises
over the next three months, reaching its lowest level since the Global
Financial Crisis.
The ECB’s
approach appeared to downplay the consequences of their previous actions, which
could potentially raise expectations of the ECB reversing course and adopting a
more accommodative monetary stance sooner than anticipated.
The robust
performance of the U.S. economy might be intensifying the tightening of
financial conditions, as Lagarde also noted that higher sovereign yields in the
eurozone were influenced by movements in the U.S. Treasury bond market. If U.S.
economic data remains strong, the effects of the ECB’s tighter policy could
become even more pronounced.
However, I
do not expect this dynamic to persist for an extended period, and I anticipate
a shift by the time of the December meeting, with lower U.S. Treasury bond
yields as U.S. economic data weakens. The Q3 real GDP data revealed a
larger-than-expected quarterly expansion of 4.9%, primarily driven by a 4.0%
increase in consumer spending.
The
noteworthy aspect for the markets was the data breakdown and its implications
for future growth. Consumer spending contributed 2.69% to the overall GDP
growth, while inventories added another 1.32 percentage points. These
components account for 4.0 of the total 4.9% growth. Government consumption
contributed an additional 0.79 percentage points. It is expected that
inventories might offset Q4 growth while consumer spending is likely to slow
significantly.
The
composition of GDP and the slightly lower core Personal Consumption
Expenditures (PCE) inflation rate (2.4% versus the expected 2.5%) contributed
to declining yields and limited the foreign exchange impact of the
stronger-than-expected GDP figure. The 10-year U.S. Treasury bond yield once
again fell short of reaching 5.00% yesterday, which reduced demand for the U.S.
dollar. Although the EUR/USD exchange rate remains resilient, there are still
risks of further dollar strength, given the current disparities in economic
performance.
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This article
was written by Luca Santos, Market Analyst at ACY Securities.