Following the Russian invasion of Ukraine, the common currency moderated on geopolitical risk. Currently depreciated levels appear to be embedding the massive surge in energy prices as well as little chance for a rate hike by the European Central Bank (ECB) this year. Inflation in Europe has accelerated and the rise in commodity prices will put the common area in a hard place, economists at the National Bank of Canada report.
A depreciated euro is certainly not ideal
“The reliance of Europe on Russian gas is significant and as such, growth perspectives for the Eurozone are under threat and the possibility of recession is growing.”
“Market expectations are for no rate hike by the ECB this year. But that path is not a certainty. Inflation in Europe continues to climb with headline prices surging 5.8% YoY. In such a context, one cannot completely eliminate the need for more restrictive policy. A depreciated euro is certainly not ideal as it feeds import price inflation.”
“While a quick resolution would alleviate pressure on the currently down trending scenario and perhaps mean some upside for the euro, the doggedness could lead to disruptions on markets the likes we have rarely seen.”
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