By: Fiona Cincotta, Senior Market Analyst
Eurozone inflation is expected to approach 4%, roughly double the European Central Bank's 2% target, and that number is keeping another ECB rate hike firmly in play. The European Central Bank is leaning toward tightening again before the end of the year, but rising stress in the French government bond market could force it to put financial stability ahead of the inflation fight. That tension sits right at the center of the euro's recovery from a 17-month low against the U.S. dollar. If the European Central Bank steps back, the euro loses one of its main sources of support.
Fiona Cincotta, StoneX Senior Market Analyst, has spent more than 15 years trading and analyzing U.K., European and U.S. markets, combining fundamental and technical analysis. She covers forex, equities, commodities and crypto assets, with a particular focus on U.K. and European market themes.
Eurozone inflation is expected to approach 4%, well above the European Central Bank's 2% target, as higher energy prices linked to the conflict in the Middle East feed through the economy. "Several policymakers have signaled that another rate hike is likely before the end of the year," Cincotta says. A hike would matter for the euro, since higher interest rates make euro-denominated assets more attractive to investors. European Central Bank President Christine Lagarde has also flagged escalation in the Middle East as a key risk, with higher energy costs heading into winter adding to the pressure on prices. The eurozone inflation picture therefore keeps the case for further European Central Bank tightening very much alive.
Rising French government bond yields complicate the European Central Bank's hiking path, as President Emmanuel Macron's government struggles to push a budget through against resistance from opposition parties. According to Cincotta, if French bond market stress intensifies, the European Central Bank "could actually find itself having to prioritize financial stability over fighting inflation". That would force policymakers to reconsider further rate hikes and potentially remove an important source of support for the single currency. Next year's French presidential election adds another layer of political uncertainty. Conversely, a deterioration in French government debt could spread into wider fiscal instability across the eurozone, keeping the euro under pressure.
--- Written by Frédéric Guétin, StoneX Media Producer
--- Expert: Fiona Cincotta, StoneX Senior Market Analyst
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