Euro: Rising inflation risks threaten resilience - Commerzbank

Commerzbank's Thu Lan Nguyen highlights that the EUR/USD exchange rate has remained stable as both the Euro and US Dollar have weakened against other currencies. However, increasing oil prices and growing inflation expectations in the Eurozone introduce downside risks. In contrast, demand for German bonds is limiting the impact of French fiscal concerns.

Both currencies have indeed weakened, but in tandem, resulting in a relatively stable EUR/USD rate. Higher oil prices disproportionately affect the Eurozone due to their impact on inflation and economic activity, which is predominantly negative for the currency. Meanwhile, inflation expectations in the Eurozone have risen more sharply than in the US, indicating that higher inflation expectations are not balanced by a corresponding shift in interest-rate expectations.

This creates a negative signal for the Euro. German government bond yields have also decreased significantly, suggesting investors are moving funds from French bonds to German Bunds without altering their Euro exposure. Therefore, the Euro has not faced more pressure so far. However, sentiment in the Eurozone can change rapidly, and it is premature to declare stability.