The Russia-Ukraine conflict has kicked things into overdrive in Europe this year and the economic landscape remains rather dire when you look at how things are developing at the moment. Parity beckons for EUR/USD and we’ve already seen EUR/CHF tumble below 1.00 after the SNB policy pivot last month. It’s tough to find much relief for the euro and here are reasons why.

1. Inflation pressures are still surging across the region

Sure, German inflation may have seen a bit of a moderation in June but near 8% inflation is still extremely high with Spanish inflation even surpassing 10% last month. As mentioned before, there is a difference between inflation peaking and inflation hitting a plateau.

The latter seems likely for most parts of the world dealing with surging price pressures and Europe is no different. The fact that oil prices and natural gas prices are set to remain elevated going into winter will only exacerbate the pain.

2. A recession beckons

The key question now will be how bad will the recession in Europe look like. As inflation takes a toll on consumption and surging price pressures grip business activity, it is looking bleak once we get past the summer sunshine. There is no easy fix and if Russia seeks to restrict supply of gas to Europe, I fear that it will shape up to be a rather harsh recession – particularly in the latter stages of the year.

3. Fragmentation risks on the cards

The ECB may be able to deal with this with their „resolve“ but at the end of the day, they need some solution to get the monkey off their back. I doubt policymakers will be helpless in letting a debt crisis spiral but they will lose some face in trying to convince markets that they can raise interest rates while ridding themselves of some form of easy policy – which have been a mainstay over the past decade.

QE but not QE seems to be what they will go with but we will see how things play out in practice.

4. The ECB suddenly looks behind the curve again

For all the talk by ECB policymakers on tightening policy, they are still yet to officially raise interest rates amid the whole inflation debate globally. As other major central banks step up their game, the ECB’s plan to raise rates by 25 bps this month and then 50 bps in September suddenly looks rather ‚lame‘.

The new meta this week suggests that 100 bps is the next hot pick and the ECB is once again being left behind. As markets rush to price in a more aggressive Fed and more frontloading by other major central banks, the ECB’s lack of flexibility is not helping the euro’s plight considering that they are not able to come together for a more aggressive tightening push.

This article was written by Justin Low at www.forexlive.com.

It’s starting to look a bit rough for stocks at the moment as the fallout from the US CPI data continues to reverberate.

S&P 500 futures are down to the lows for the day, dropping by nearly 1% now as risk starts to falter in European morning trade. Regional indices are also caught in the crossfire with the DAX now down 0.9%, CAC 40 down 1.2%, and Italy’s FTSE MIB leading the declines with a drop of 2.2% – not helped by domestic political uncertainty.

After the Bank of Canada decision yesterday and Fed policymakers opening the door to a 100 bps move as well, it is spooking markets a little amid prospects of major central banks frontloading rate hikes in a more aggressive manner.

This article was written by Justin Low at www.forexlive.com.

The yen continues to implode as traders are using the US CPI data this week as a catalyst for a push higher in USD/JPY once again. It’s not a perfect excuse but the timing fits as the data mainly reaffirmed that the ongoing narrative over the past two to three months is very well vindicated still at this stage.

That is enough to give USD/JPY another boost after weeks of a struggle to shake off a firm break above 135.00.

The push higher in Treasury yields today is also helping, with 10-year yields up 8 bps to 2.985% on the day. As much as there was a negative reaction for yields yesterday, it is hard to imagine a material climb down in rates so long as the market focus remains on a more aggressive Fed.

We may have seen a peak in yields already but a reversal of the trend is still something that may be a bit of a reach, unless traders start to turn their attention towards rate cuts and more material risks of a recession in the months ahead.

Either way, the technicals continue to do the talking – much better than Japanese authorities – in USD/JPY and 140.00 beckons now as price trades above 139.00 to its highest in over two decades.

This article was written by Justin Low at www.forexlive.com.