As natural gas supplies commenced throughout the Nord Stream 1 pipeline linking Russia and Germany, the euro experienced a brief boost in Asia-Pacific trading. Markets were concerned that Moscow may threaten to withhold essential supplies in the midst of its dispute with the West over the Ukraine takeover.
Prior to the pipeline being shut down for scheduled maintenance, flows were significantly reduced during the conflict. When it took longer than expected to get it back up and running, all parties involved started blaming each other, with the Eurozone taking a shot at the Kremlin while Russia pointed the finger at Canadian suppliers of parts. The markets were alarmed by all this turmoil.
Cognizant of impending significant event risk, the single currency found it difficult to create progress that would last. First off, following a vote of confidence on Wednesday, the future of Italian Prime Minister Mario Draghi seems uncertain. Draghi prevailed, but widespread abstentions show he is not supported by enough lawmakers to make decisions anymore, thus potentially triggering his resignation.
The third country in line based on economic development in the Eurozone is experiencing political unrest at a bad moment since the European Central Bank (ECB) is about to start tightening policy in full in response to skyrocketing inflation. The price of a 35 bps rate increase indicates a -15 bps policy rate. Then, by the closing of 2022, it is anticipated to reach 1%.
It has been a difficult road to this point. Markets fear that rate hikes would reignite Southern Europe’s debt crisis, so the ECB has rushed to develop a mechanism to prevent “fragmentation,” or difference in bond yields between the member states of the currency bloc.
Operation Sovereign Twist may be the name of the policymakers’ plan to deal with this, mirroring the Fed’s strategy to shuffle the maturities of the bonds it holds on its wealth. Similar changes would be made to the sovereign asset mix in the ECB’s asset portfolio to increase the amount of paper from struggling countries.
According to the central bank, the anti-fragmentation mechanism would function by reinvesting the money from maturing higher-grade debt holdings into the acquisition of lower-grade substitutes. This may therefore determine the rate at which the ECB can tighten, thereby restricting its capacity.
Markets may be concerned due to the lack of precise operational information on this and other still-uncertain elements of how this initiative will operate. The magnitude of hikes after today may also be softened. The euro may decline if the markets detect reluctance at the press conference with Christine Lagarde, the president of the European Central Bank (ECB) following the announcement.
The Euro and the US Dollar are still in a downturn. Having testing the anticipated parity level, prices managed to rise in recent sessions, however sellers may be gearing up to retake the lead.
