Market Overview

Newly released March economic data for the Eurozone highlights elevating economic troubles and investors’ pessimism. The Business and Consumer Survey, which measures the level of confidence in the Eurozone, fell to 108.5 points from the previously 113.9 points. The survey also showed that Business Climate, that provides a general look at business health for a period, fell to 1.67 from 1.79 and the Industrial Sentiment dipped to 10.4 from 14.1.

The European economy is suffering from elevating negative pressure from the Russia-Ukraine warfare that has been pushing energy prices up and therefore disrupting supply chains and causing deficit. Together with refugee issues, elevated geopolitical tensions, and risks this may cause the economy to suffer further. The European Central Bank’s (ECB) President Christine Lagarde warned that significant economic risks are rising due to the war. “Europe is entering a difficult phase… there is considerable uncertainty about how large these effects will be and how long they will last for,” Lagarde said, while also adding that   “any adjustments to the key ECB interest rates will take place sometime after the end of our net purchases under the [bond-buying program] and will be gradual.” She also said  that households are getting more pessimistic now, while business may delay further investments.

The major impact on the economy was made by inflation which significantly undermines consumer activity despite government subsidies.

A bigger problem may arise in the form of upcoming stagflation and this poses a dilemma for ECB. Central banks usually tighten monetary policy to tackle inflation but now such moves may cause a steeper recession which could hamper consumers even more. Mrs’. Lagarde promised that the ECB will make these moves gradually without making any long-term obligations. This may mean that the ECB’s interest rates may be hiked for the first time at the end of this year.

In such circumstances, the ECB’s policies may diverge deeper from other major central banks that are looking for swift monetary tightening and rising interest rates. This would certainly affect the Euro that stopped climbing just before a strong resistance at 1.12000. The single European currency lost ground and fell on Thursday below 1.11000. The next downside target may be at the support level at 1.09700-1.10000. A further possible downside to move the EURUSD to the two-year lows at 1.08000 may not be excluded.

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