The EUR-USD market …
The EUR-USD was trading around 1.1813 about 10:00 pm EST and I read nothing out of the European Central Bank this week that could impact the interbank market today. The most recent comments out of the ECB regarding the European economy came during a speech by Isabel Schnabel, a member of the ECB’s Executive Board.
Ms Schnabel’s general assessment was that the economy is brightening for the Euro area and although Covid-19 is resurging, consumers and businesses appear upbeat about future economic performance. Inflation, the universal economic buzzword, is at 3% per an August print, thus exceeding the ECB’s two-percent target rate. Inflation, according to Ms Schnabel, is likely to keep growing through the end of 2021.
Meanwhile, real interest rates in Germany remain in the negative. The rate for the ECB deposit facility is at -.50%. This is the policy rate at which bank excess funds are deposited overnight with the ECB. Banks, in essence, are paying the ECB to hold their excess funds.
Contrast the ECB rate with the overnight interbank rate (fed funds rate) of the Federal Reserve which currently has a target rate of 0 to .25%.
Ms Schnabel warned against premature tightening of rates. She noted that while inflation may increase through the rest of the year, it may abate around the beginning of 2022. She also cautioned that while inflation appears high, the economy is coming off of a pandemic-induced slow down and in real terms inflation is still low.
Ms Schnabel was kind enough not to use the word, “transitory.”
Otherwise, the ECB so far has been mum. So has the Federal Reserve as it gets ready for its Federal Open Market Committee meeting on September 22-23.
Ms Schnabel’s comments also did not veer off from last week’s monetary policy decision to maintain the ECB’s €20 billion in monthly asset purchases while modifying the pace at which the ECB would make asset purchases.
Data from OANDA has the EUR-USD flat lining since 14 September but also reflecting a slight raise in the exchange rate since Ms Schnabel’s speech. While I do not expect the rate to fall below 1.1800, I don’t see an argument for now as to why the exchange rate will not continue to fall below 1.1800 by month’s end. Like everyone else, I do not have a crystal ball.
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