Barclays Sees the Euro Dip as the Fed and ECB Break Apart on Rate Hikes
(Bloomberg) -- There’s further trouble in store for the euro after European Central Bank President Christine Lagarde all but ruled out a rate hike in 2022.
That’s the view of Kristen Macleod, co-head of global foreign-exchange sales at Barclays Plc., who sees the common currency weakening as the ECB and Federal Reserve’s monetary policy paths further break apart following this week’s central bank announcements.
“Largarde was very, very clear that it’s extremely unlikely the ECB will hike,” Macleod said in a phone interview. “The ECB almost to some extent wants to intentionally show that contrast between what they are doing and what the Fed is doing.”
“By and large our clients are pretty comfortable selling the euro,” she added.
Barclays doesn’t expect the ECB to hike rates until early 2024, though they see a small chance it could come in late 2023. In contrast, money-market traders are positioning for the Fed to raise borrowing costs by 25 basis points by June, with another hike in November and a third in early 2023.
Divergence to date is already weighing on the currency. The euro has fallen nearly 8% since late May on signs that the U.S. central bank will normalize policy faster than its European peer.
Options traders are positioned for further weakness. Sentiment on the euro over the coming year, as measured by risk reversals, is near its most bearish in 18 months.
ECB President Lagarde on Thursday unveiled updated macroeconomic forecasts that project inflation above the ECB’s 2% goal for most of 2022, averaging 3.2%. Officials then see price growth below the goal in 2023 and 2024, at 1.8% in each year.
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