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Euro Rides to Dollar Parity, but Doubts on ECB Ability to Curb Inflation Linger

Published 08/29/2022, 02:42 PM
Updated 08/29/2022, 03:34 PM
© Reuters.

By Yasin Ebrahim -- The euro on Monday hitched a ride to parity against the dollar as European Central Bank members talked up front-loading rate hikes, but some suggest there is still doubt over whether the ECB will be able to curb inflation and that could keep the dollar bulls alive.    

EUR/USD rose 0.25% to 0.999, though it had climbed to a session high of $1.002 earlier.

The odds of the European Central Bank hiking rates by 75 basis points on Sept. 8, jumped to 67%, according to data from Refinitiv, after ECB members surprised markets by following up Federal Reserve chairman Jerome Powell's hawkish comments with some of their own over the weekend.

Isabel Schnabel, member of the ECB’s executive board said that ECB “policy makers should also not pause at the first sign of a potential turn in inflationary pressures...but rather, they need to signal their strong determination to bring inflation back to target quickly.”

But some remain unconvinced and question whether the front-loading of rate hikes will be enough to convince investors that the ECB will do what is necessary to fight inflation as the central bank is well behind the curve. 

The jury is still out on whether a 75-basis-point rate hike in September "would be sufficient to convince the market in view of the fact that the ECB is likely to be seen as being well behind the curve," Commerzbank said in a note.

Inflation data from eurozone members in the coming days will likely show whether the ECB's tough talking has helped rescue control back from those who remain unconvinced. Eurozone Inflation, due Thursday, is expected to have rises to 9% from 8.9% in the 12 months through August. 

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If the euro moves markedly higher on an upside surprise in the inflation "this would be a sign that the market expects a sufficiently strong reaction on the part of the central bankers," Commerzbank added, but it is more likely that the data would "provide only limited support for the euro."

With the economic headwinds for European piling up, and the Fed likely to keep interest rates higher for longer, Goldman Sachs threw its support behind the greenback.   

"Dollar still looks like the clearest long in the near term," Goldman Sachs said in a recent note, citing Powell's hawkish speech at Jackson Hole last week and economic headwinds on the horizon for Europe. The Fed chief said that the central bank is in favor of a "lengthy period of very restrictive monetary policy" to curb inflation even if that will bring "some pain" to households.

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