Euro Declines After Three-week High as Italian Yields Move to Zero

A Little Slide

The Euro shed some weight on Tuesday following comments by the European Central Bank’s President, Christine Lagarde when she attempted to control the high expectations trailing a rise in interest rates which boosted the regional currency up a three-week high on Thursday.

The European Central Bank’s hawkish drift last week was a surprise move to the market, and it sent Eurozone member countries yields on a spin with debts increasing exponentially while investors expressed concerns over the impact of possible rapid tightening policies on the bonds of countries with the highest debts.

It was on Monday that Christine Lagarde sounded a note of warning and some consolation while saying that it is not likely that high inflation lingers, but an ECB and Governor of the Bank of Spain, Pablo Hernandez de Cos, advised on Tuesday that moves by any of the Eurozone Central Banks have to be a gradual one.

Bond yields in the Eurozone dipped a little on Tuesday, but the general atmosphere in the money market is a palpable worry that a steep increase of bond yields might have some adverse effect on the possibility of a broad economic bounce-back. 

The worries were more towards and focused on outlying economies like Italy, which has had its ten-year bond yield rising to its point for the first time since last May as inflation-molded yields are a mere step away from reaching more positive areas, after rising by 50 basis points since the European Central Bank made their policy decision public.  

Early Tuesday trading showed the Euro down by 0.1%, fighting to stand above the $1.14 points. It rose to a height of $1.1483 during Friday’s trading, the highest it has got since January 14. 

Italian Concerns

A financial strategist at Societe Generale, Kenneth Broux, has raised fundamental questions as to whether the Euro can go higher if outlying spreads go off and peradventure if Italy’s ten-year real yields become positive; will its economy be able to cope? He said it is a million-dollar question that investors are posing.

Investors, likewise, were cautiously considering the future path of interest between Europe and the U.S. 

Strategists at Unicredit released a note where they hinted that investors know that when the European Central Bank’s shock gets fully absorbed, interest rates will be set to rise more in the United States than the Eurozone in a matter of months.

As the markets were pricing in up to 134 basis points in total rates increase by the Federal Reserve spread out in 2022, analysts are anticipating 50 basis points in a rate increase by the European Central Bank in the same period.  

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