The euro still can’t make it!

With the release of US inflation figures last week, the dollar initially lost some value against the euro. There are hopes the worst has passed, with drops in the consumer and producer prices indices published on Wednesday and Thursday, respectively. Inflation thus fell back to 8.5% in July after reaching a 40-year high of 9.1% the previous month. This favourable change is the result mainly of falling energy prices – 4.6% lower over one month – but also by the fall in the prices of airline tickets and used vehicles. The market reacted by immediately lowering its expectations to a 0.50% hike in key rates on 21 September, down from 0.75% previously. The euro briefly rose back above $1.0350 in the wake of these figures. But the improvement was short-lived as fears of a recession in Europe washed away all the ground gained at the end of last week. The shortage of gas, with prices rising steadily to their highest level since March at €230.00/MWh, and the continuing high prices of raw materials raise the spectre of a marked slowdown in economic activity in the Old Continent. Gazprom announced yesterday that gas prices could rise by 60% this winter. As a result, the EUR/USD fell below 1.0200 yesterday. More information will soon allow the market to refine its projections for US rates. The release of the minutes of the last Fed meeting this evening should confirm whether it is willing to continue with its monetary tightening. Further inflation and employment data will be released by 21 September, allowing the Federal Reserve to refine its decision.

The euro is also falling against the franc and moving away from parity. At CHF 0.9600, the euro is at its lowest level since the floor was abandoned in March 2015. This trend is not expected to be reversed in the short term as a strong franc is helping to combat imported inflation. In the past decade, the SNB wanted to prevent the franc from appreciating too much against the European currency In a context of weak growth, the priority was to support exports to the EU, the Swiss economy’s main trading partner. Now it’s inflation that the SNB wants to fight, so having a strong currency is a good thing in this environment. Analysts are now wondering how far down the European currency can reasonably go and agree on one fact; that the downside potential is becoming limited.

In China in July, inflation rose from 2.5% to 2.7% due to soaring pork prices. This level remains low by international standards but is close to the 3% target, while the producer price index fell from 6.1% to 4.2% year-on-year, showing a decline in domestic demand. China’s central bank surprised the markets earlier this week by lowering the cost of borrowing by 10 percentage points to 2.75% in an effort to support growth as the Chinese economy has been battered by successive COVID waves. This decision shows Beijing’s growing concern about the decline in consumption and the difficulties of the property market. The Chinese currency fell on the announcement from ¥6.7400 to the dollar to ¥6.8200 and is approaching the year’s low of ¥6.8380 Yuan reached on 13 May. It had started the year at ¥6.3600 to the dollar.

In the UK, the pound is falling in the face of poor economic data. Gross domestic product fell by 0.1% in the second quarter, compared with growth of 0.8% previously. While the labour market remains robust, industrial production plummeted in June, contracting by 0.9%, and inflation rose above 10% in July. The British currency fell against the dollar and the Swiss franc, although it did hold its own against the euro. Against the franc, at 1.1450, it is slipping towards the lows of the year and is close to the record low of 1.1116 seen in March 2020.

Au Royaume-Uni, la livre recule face aux mauvais chiffres publiés. Le Produit Intérieur Brut affiche un recul de 0.1 % au deuxième trimestre contre une croissance de 0.8 % précédemment. Si le marché du travail demeure robuste la production industrielle a elle plongé en juin affichant une contraction de 0.9 % et l’inflation est passée au-dessus des 10 % en juillet. La devise britannique recule contre le billet vert et le franc suisse tout en se maintenant contre l’Euro. Face au franc, à 1.1450, elle évolue sur les plus bas de l’année et se rapproche du niveau historique de mars 2020 à 1.1116.

Crude oil prices fell on fears that a global and particularly Chinese economic slowdown would reduce demand and on the prospect of Iranian oil returning to the market. An Iranian nuclear deal could lead to an end to sanctions for this key member of the Organization of the Petroleum Exporting Countries. There is still a long way to go, but the situation with Russia could encourage all parties to reach an agreement faster. The country could therefore increase its production by one million barrels per day in a few months, flooding the market while demand is weakening. WTI crude oil traded below $90 a barrel this morning.