The Euro continues to fall

Despite the positive news for the euro, it has so far been unable to recover and continues to fall against the dollar.  Emmanuel Macron’s victory in France, good German economic figures, various comments from the ECB all pointing to monetary policy normalising in July have all failed to prop up the euro. After rebounding to 1.0851 following the announcement of Emmanuel Macron’s re-election, the European currency fell back against the dollar to a low of 1.0621 this morning, the lowest level since March 2020. And one has to look to 2016/2017 for the last time the euro traded below that mark. News of Macron’s second term reassured the markets, but the legislative elections to be held in June could hold surprises and deprive him of a majority in favour of a left rejuvenated by Jean-Luc Mélenchon’s good showing in the first round. This did not fail to worry the markets and put pressure on the euro.

Moreover, monetary policy differences between the two sides of the Atlantic are exerting powerful pressure on the single currency. The spectre of a faster- and deeper-than-expected monetary tightening in the US is looming over the markets. At a debate organised by the IMF, Federal Reserve Chairman Jerome Powell confirmed that a 50 basis point rate hike would be on the table at the next meeting on 3 and 4 May. The aim is to act more quickly against particularly high inflation, which is at a 40-year high in the US. Jerome Powell’s comments were interpreted as opening the door to at least two half-point hikes by this summer. In any case, 30-day interest rate futures are supporting such a scenario. The June contract reached a level of 1.13% while the September contract reached 2%. Among the staunchest hawks, James Bullard is even bringing up a 75 basis point increase. Such talk is taking Treasury yields higher and the five-year rate reached 3.0331% on Friday. The US five-year has not been at 3% since October 2018. The European Central Bank could also soon follow the Fed’s lead. On Friday, its president Christine Lagarde hinted that there was a good chance the institution would raise interest rates as soon as this year, but the time lag between the two institutions is being highly detrimental to the single currency. On top of it all, the situation in Ukraine remains far from being resolved: matters have actually become even more tense with the latest statements by Sergey Lavrov. Mr Lavrov warned Westerners not to underestimate the risks of nuclear war in Europe.

The British pound had a very difficult week. The British currency also fell sharply against the dollar, hitting a low of 1.2698 on Monday, down from almost 1.3100 last Thursday. Markets are concerned about the UK economy after the release of disappointing figures. Retail sales in March fell and the slowdown in the private sector was more intense than expected. These latest developments are raising fears that the Bank of England may have to review its monetary policy future, although the market had expected it to raise rates several times this year.

In China the yuan also had a difficult week against the dollar. The Chinese currency has just completed its worst week in four years. It fell from CNH 6.3780 to the dollar on 19 April to a peak of 6.6092 on Monday, a level not seen since late 2020. The rise in US interest rates, which has led to the loss of all or part of the yield differential favourable to Chinese bonds, and a still complicated health situation are behind the decline in the yuan and the fall in the stock market. Still, the Chinese currency remains well off the 2019/2020 low of 7.1965.

Suffering equally from this environment, crude oil prices remain under pressure. Ongoing concerns about the possibility of a longer lock-up in Shanghai impacting demand and a consequent rate hike in the US that could hurt global economic growth are weighing on prices.  Oil prices rose slightly yesterday, climbing back above the $100 mark.

The same has been happening to the main financial markets, which have been in the red since Wednesday. Cooled by the tougher words from central bankers, the deteriorating situation in China, and the uncertainties related to Ukraine, they are largely on the defensive. Wall Street lost 6.4% on the S&P and more than 8% on the Nasdaq, the European markets are down from 2 to 3% and Asia is down 4%. With a few exceptions, stock markets have seen double-digit losses since the beginning of the year.