Bank of America’s strategists say the euro is in for more pain, even after the worst first half it has seen since 2015.
Bank of America strategists, led by Athanasios Vamvakidis, released a note on Friday looking at the euro’s prospects.
They noted that as the Federal Reserve and other Central Banks have pursued aggressive strategies to lower inflation, increasing interest rates by 50 or even 75 basis points, the European Central Bank is taking a more cautious approach, trying to avoid upsetting economic growth, at the expense of giving inflation a freer hand. They feel that could put the currency at a disadvantage through the summer, and they expect the euro will “remain under pressure” for the remainder of the summer.
That contrasts with the strategy of Federal Reserve Chair Jerome Powell, who just spoke at the annual ECB forum in Sintra, Portugal, this week. His essential message was inflation may be slightly more persistent in this cycle, and it may require throwing out the old playbooks from the last 20 years, where you do not crush economic growth in order to suppress inflation. It may require tolerating some reduction in economic output, in order to prevent rapidly rising prices from slowing economic output by raising prices to the point consumers stop buying.
However Bank of America’s strategists note that it appears ECB President Christine Lagarde may not be willing to adopt that type of aggressive path.
As in America, inflation in Europe is proving more aggressive than was believed. This week’s numbers in Europe showed inflation had surged to a new record, surpassing all expectations. And while many experts were calling for aggressive rate hikes to contain it immediately there were also many voices fretting that hiking interest rates too high, too fast, could throw the whole European economy into a recession.
The euro continued to fall on Friday, to $1.0423, a drop on about 0.6%. So far, in the first half of the year, the euro has dropped by about 7.8%.
In the note the strategists also spoke of being bearish on the yen for the next few months at least, however there could be a cyclical boost in the fourth quarter if there were to be a correction.
