FXstreet.com (Barcelona) - Lee Hardman, FX analyst at the Bank of Tokyo Mitsubishi UFJ believes that the Eurozone is emerging as a potential victim in a currency war with the euro strengthening on the back of the combination of tightening monetary and fiscal policy, at a time when a weaker euro would help support the required economic adjustment.

He adds that while all other G10 central banks are still easing monetary policy or remain on hold, the ECB is currently seeing a modest tightening in monetary policy as unconventional measures naturally unwind reflecting improving conditions in the European banking system. It was announced that European banks will initially repay early a larger than expected EUR 137.2 billion of the EUR1,018.7 billion of three-year LTRO funds borrowed.

Hardman believes that it is estimated that prepayments totalling greater than EUR350 would be necessary to lead to a more significant move higher in eonia lifting short-rates in the euro-zone. In contrast, the pound is weakening which in part is being driven by expectations that BoE monetary policy will become looser still to support growth more when BoE Governor King is replaced by BoC Governor Carney.

He finishes by writing, “While a shift to a temporary nominal GDP-level target appears unlikely, top Treasury officials have reportedly told the FT that Chancellor Osborne thinks that a move to make the inflation target “more flexible” will likely prove to be sufficient.”