Euro Down As Lockdown Returns and Risk Sentiment Turns Negative

The Euro’s upside run was short-lived, as Euro selling resumed following ECB President Mario Draghi’s dovish comments. In addition, Austria has gone back into full lockdown, with Germany perhaps following suit in the fourth wave of COVID-19 infections. The yen is rising sharply today as risk sentiment deteriorates. For the week, the Euro has been the weakest performer, followed by the Australian dollar. The best performer is still the pound, followed by the yen, and finally the dollar.

The President of the European Central Bank, Christine Lagarde, said in a speech that the central bank’s focus is “in the medium term, not the current inflation figures”. “When inflationary pressures are expected to subside-as is the case today-there is no point in responding through austerity policies,” she added. “Until the shock has passed, austerity measures will not affect the economy.”

Lagarde also stated that “supply shocks” will tend to “push up inflation and curb output.” In this case, “tightening monetary policy will only intensify the contraction effect on the economy.” The Euro is facing a “mixed shock”, partly related to catching up with demand, but with “strong supply drivers”. “Tightening policies prematurely will only make the squeeze on household income worse.”

“The conditions for raising interest rates next year are unlikely to be met,” she said. “In addition, even after the pandemic emergencies are expected to end, it is still important for monetary policy-including appropriate adjustments to asset purchases to support the recovery and the sustainable return of inflation to our 2% target.”

Euro Downward Trend Could Continue

Analysts agree that widespread lockdowns in Europe in the coming months will deal a severe blow to Eurozone growth (implying downward revisions to estimates), providing the ECB more incentive to be dovish in the face of high inflation. The pair had reached a new 16-month low of 1.12501 by late European morning. As the US session began, some profit-taking allowed it to recover to as high as 1.1320, but hawkish comments from key Fed members infused upside into short-end and real US government yields, giving the dollar a lift.

Looking back on the week as a whole, it’s been a disaster. The pair is on track to end the week with weekly losses of around 1.4 percent, its worst performance since mid-June. Strong US retail sales, the NY and Philly Fed surveys, Weekly Jobless Claims and Building Permits data, as well as data on Friday, all contributed to the dollar’s upward movement. Meanwhile, the single euro has been hit by the ECB’s dovish tone and the mounting Covid-19 situation in Europe.