View of the day: Strong euro

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Recent hawkish comments by European Central Bank officials have convincingly demonstrated that the ECB does not really mind a strong euro, says Marco Annunziata, chief economist at UniCredit.

He still believes the next interest rate move by the ECB will be a cut, but does not now expect it until December, six months later than he previously thought, as inflation has proved higher and more persistent than forecast.

“The ECB has upped the antes, and having successfully pushed the market to price out any chance of monetary easing this year, is again warning that rate hikes, not cuts, may eventually be on the agenda,” Mr Annunziata says.

He says the ECB’s policy stance so far has been appropriate, given its desire to lean against wage pressure, but believes the threat of rate rises to be excessive in the current environment,

He adds that if ECB officials maintain their hawkish stance, two-year bond yields in the eurozone will head to 4 per cent in the next few weeks and the euro will settle above $1.60.

Moreover, he is worried that if some of the downside risks to growth materialise, the tightening in monetary and financial conditions fostered by the ECB’s delayed monetary response will condemn the eurozone to a prolonged slowdown.

“I worry that the ECB might be dreaming the impossible dream of full decoupling, fighting the unbeatable foe of commodity prices, to reach the unreachable star of below 2 per cent inflation.”

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