Euro's losses deepen as markets take dim view of ECB stance

By Kitco News / October 29, 2021 / www.kitco.com / Article Link

LONDON, Oct 29 (Reuters) - The euro's losses deepened on Friday, retracing nearly half of its gains in the previous session, as euro zone inflation shot past expectations this month to equal its all-time high, creating a policy dilemma for the European Central Bank.

The single currency which has broadly struggled against its rivals on Friday, slipped to more than one-year lows against the Swiss franc as Italian bond yields resumed their upward march a day after the European Central Bank struck a dovish note at a policy meeting.

President's Christine Lagarde's failure to push back against market expectations of higher interest rates has brought out the bears with Danske Bank strategists expecting the euro to fall to $1.10 over the next 12 months saying "if inflation proves longer-lasting, the comments today makes us less confident that ECB would not change policy rates eventually."

Data on Friday showed inflation in the 19 countries sharing the euro rose to 4.1% in October from 3.4% a month earlier, beating a consensus forecast of 3.7%. That reading is the highest since 2008 and equals the all-time-high for the time series launched in 1997.

"Investors are just not buying what the ECB is saying," said Marios Hadjikyriacos, a senior investment analyst at brokerage XM.

"With inflation expectations going ballistic, markets are betting the central bank will be forced to take its foot off the gas sooner, first by slashing asset purchases and then with tiny rate increases."

Money markets are nearly fully pricing in a 10 bps rate hike from the European Central Bank by July 2022 and nearly two rate hikes by October 2022. A week ago, markets were pricing in barely one rate hike by October 2022 and less than half a rate hike by July 2022.

Major currencies have failed to benefit from surging yields on short-term government debt globally as investors have weighed the likelihood that central banks risk falling behind the curve in taming widening inflationary pressures that was perceived as transitory.

On Friday, the single currency slipped 0.1% versus the dollar at $1.1674. It tanked to its lowest level versus the Swiss franc since July 2020 at 1.0625 francs per euro .

Elsewhere, the dollar index , which measures the currency against six main rivals, including the euro, edged up 0.1% to 93.462, but remained close to Thursday's low at 93.277 - a level not seen since Sept. 27

The Australian dollar eased 0.1% to $0.7537, after reaching the highest since early July at $0.75555 in the previous session.

In cryptocurrencies, ether rose to a record $4,400, while bigger rival bitcoin also gained to trade around $61,200, but down from the record $67,016.50 reached last week.

Reporting by Saikat Chatterjee; Editing by Angus MacSwan and Raissa Kasolowsky
Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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