Eurodollar Declines to $1.18 as Investors Await ECB Policy Meeting

The euro dollar fell to $1.18 after climbing over $1.19 for the foremost time after June 30th. ingnvestors are waiting for the European Central Bank’s policy meeting tomorrow to see if the bank will start reducing its bond-buying initiative after statistics suggests Eurozone inflation soared to a decade high last month and remarks from many of the ECB hawks such as Austria’s Robert Holzman and Bundesbank boss Jens Weidman.

ECB Governing Council member Robert Holzmann cautioned that the central bank could tighten policy quicker than market expectations because inflationary pressures could linger, while Bundesbank President Jens Weidmann alerted that inflation could outstrip the ECB’s estimates because temporary aspects behind the dramatic rise could water down the fundamental price gains.

The French trade gap increased to EUR 6.96 billion in July 2021, up from a corrected EUR 6.05 billion last month, the biggest loss since August last year. Exports fell by 1.9% due to decreased sales of many other industrial goods (-5.6%), transportation equipment (-4.8%), and food sector products (-2.1%). Exports to the majority of areas fell, most noticeably to the EU (-5.0%), Asia (-4.8%), and European nations well outside EU (-2.6%).

In the meantime, imports increased by 0.1%, aided by acquisitions of mechanical machinery, electrical, electronic, and computer equipment (1.2%); and natural hydrocarbons, other mining goods, electricity, and waste (5.3%), with a fall in transport machinery (-6.8%) offsetting most improvements. Purchases from the EU (0.5%), Asia (2.4%), and European nations outside of the EU were greater among major trade partners (4.4%).

France’s current account deficit increased to EUR 3.5 billion in June 2021, up from EUR 0.9 billion in the earlier month and above market forecasts of a EUR 1.4 billion shortfall. The most recent reading indicated the widest disparity since September 2020. The goods deficit increased to EUR 5.9 billion in July, up from EUR 3.8 billion in June, while the services surplus shrank to EUR 2.8 billion, down from EUR 3.3 billion.

In the meantime, the primary income surplus remained unchanged at EUR 3.6 billion, while the secondary income deficit remained unchanged at EUR 4.0 billion.

Retail sales in Italy fell 0.4% m-o-m in July 2021, after a 0.7% increase the earlier month. It was the sharpest drop in retail activity since January, as non-food sales dropped (-0.6% vs. 0.3% in June), while food sales were constant from the previous month (vs 1.0%). Retail sales was up 6.7% y-o-y in June, after an upwardly revision of 7.9% in June.

Rising eurozone inflation serves as the background for the European Central Bank governors’ meeting on Thursday, with markets looking for clues as to when policymakers would begin to ease their enormous pandemic-era stimulus. As the 19-nation club’s economic recovery gained traction, consumer prices increased at a rate not seen in a decade in August, exceeding three percent and exceeding the ECB’s new two-percentage-point goal.

The ECB’s head, Christine Lagarde, has already pledged to “see through” the spike, and officials anticipate that the rate will climb much higher in the coming months before dropping down.” “We are more concerned about the medium-term inflation rate being too low rather than excessively high,” Isabel Schnabel, a member of the ECB’s executive board, said last month.

The ECB believes that the rise in consumer prices is due to one-time, pandemic-related impacts when energy prices recover and measures intended at reducing the economic impact are reversed. As a result, despite some grumbling among its 25 members, analysts do not anticipate the ECB’s governing council to touch historically low interest rates or make any major changes to its mammoth bond-purchasing program.

Jens Weidmann, head of the German Bundesbank, advised the ECB in August not to disregard the danger of rising inflation, and said the ECB should be prepared to gradually reduce its bond-buying program.

“Even though some ECB hawks have re-emerged in recent days,” ING bank analysts Carsten Brzeski and Antoine Bouvet wrote, “we do not anticipate their resistance to be strong enough to produce any changes to the ECB’s monetary policy stance.”

To assist the eurozone in dealing with the coronavirus problem, the ECB announced a 1.85-trillion-euro ($2.2-trillion) pandemic emergency bond-buying programme (PEPP) last year. The massive asset purchases, which are expected to continue through March 2022, are intended to keep borrowing rates low in order to keep credit flowing and economic growth afloat.

The ECB will also release its latest quarterly growth and inflation projections on Thursday, although experts anticipate few surprises. Inflation is expected to remain essentially constant, at 1.5 percent in 2022 and 1.4 percent in 2023, leaving the ECB’s 2.0 percent target far out of reach.

Lagarde’s press conference on Thursday will be scrutinized for any indications of future policy shifts as the eurozone recovers from the coronavirus shock. Future strategy must be “nearly surgical,” she recently told Time magazine, adding that it is “no more a matter of enormous assistance, but of concentrated, targeted help in those areas that have been severely harmed.”

All eyes are on the ECB’s next step after the Federal Reserve publicly discussed reducing stimulus in the United States, where the economic recovery is seen to be farther advanced.