Live Markets: Is the euro zone inflation scare over?
LIVE MARKETS-Is the euro zone inflation scare over? Adds blog post
Welcome to the home for real-time coverage of markets brought to you by Reuters reporters. You can share your thoughts with us at markets.research@thomsonreuters.com
IS THE EURO ZONE INFLATION SCARE OVER?
Not long ago, markets thought the European Central Bank would have to raise rates three times this year to prevent high energy prices spilling over into broad inflation.
Now, that looks a long way off. Obviously the opening of the Strait of Hormuz is the main reason, but the last 24 hours have given those betting on a more dovish ECB a further boost.
Euro zone PMI surveys on Tuesday showed input costs rose at their slowest pace since just before the outbreak of war in the Middle East in February, easing across both manufacturing and services.
What's more, the survey was largely collected before the U.S./Iran memorandum on June 17, according to Barry van der Laan, senior FX strategist at Monex Europe. "So the final data may reflect further easing of energy and shipping concerns."
And a day earlier, ECB President Christine Lagarde said the inflation shock was not yet large enough to generate dangerous second-round price effects.
In combination, the two mean the bar for a second ECB rate hike has been raised, according to analysts at Societe Generale, who began their morning note asking is the "Inflation scare over in the euro zone?"
They point out that the gap between U.S. and German two-year yields is now above 160, its highest in nine months, and say euro/dollar is heading for a $1.13 handle — it's not got far to go, it's currently at $1.141 a near one year low. One-year euro zone inflation swaps are below 2.5% EUCPIZ1Y=TWEB for the first time since early March - above the ECB's 2% target but below May's three-year peak at nearly 4%.
While technicals are getting a little stretched, SocGen think the euro could fall "towards $1.135 area if $1.1390 gives way."
And there's still scope for more moves. The ECB raised rates this month and markets are still pricing one more 25-basis point increase this year. 0#EURIRPR
So if that starts to get priced out, while markets still see a Fed hike this year, the euro could struggle.
(Alun John)
******
EARLIER ON LIVE MARKETS:
DRINKS AND DRUGS OFFER SHELTER AS STOXX DROPS 1% CLICK HERE
BEFORE THE BELL: TECH SELLOFF TO DRAG EUROPE LOWER CLICK HERE
YEN ZOOMS INTO TROUBLE CLICK HERE