The energy crisis comes alongside an economic slowdown, which has raised doubts about whether the European Central Bank can tighten policy enough to reduce inflation. The ECB has announced it will raise interest rates this month for the first time since 2011 as inflation in the eurozone stands at 8.6%.
However, some say the ECB is way behind the curve and that a hard landing is all but inevitable. Germany posted its first goods trade deficit since 1991 last week as fuel prices and general supply chain chaos pushed import prices up sharply.
“Given the commodity-price-sensitive nature of Germany’s exports, it remains difficult to imagine that the trade balance could improve significantly from here in the coming months, given the expected slowdown in the eurozone economy,” the analysts wrote. of Saxo Bank. recent note.
A series of aggressive rate hikes by central banks, including the Fed, combined with slowing economic growth will keep pressure on the euro while sending investors to the US dollar as a safe haven, analysts say.
The US Federal Reserve is well ahead of Europe in terms of tightening, having raised interest rates by 75 basis points while signaling more rate hikes are on the way this month.
This safe retreat in the US dollar could become even more extreme if Europe and the US enter recession, Deutsche Global FX Research head George Saravelos warned in a note last week.
A situation where the euro trades below the US dollar in a range of $0.95 to $0.97 could “well be achieved,” Saravelos wrote, “if both Europe and the US find themselves sliding into a (deeper) recession in the third quarter while the Fed continues to raise rates.”
That’s good news for Americans planning to visit Europe this summer, but it could mean bad news for global economic stability.
