Carlos Arenas, EI fund analyst, highlights that although inflation data in Europe seems more controlled than in the US, the ECB could be pressed to reduce interest rates for reasons other than those that the market anticipates.
One of the main concerns that argues is the impact of a possible decrease in types by the Federal Reserve. If the Fed reduces its types once or twice this year, the euro could be seen even more against the dollar. In a context where key economies of the Eurozone, such as Germany and France, already face stagnation and instability, an appreciation of the euro could further decrease exports, slowing down economic growth. This scenario underlines the delicate balance between price stability and the promotion of economic growth.
Another crucial factor is the growing financing cost for states. Sovereign debt, both at 10 and 30 years old, is experiencing a significant increase. Although the ECB has the instrument of transmission protection (TPI) since July 2022 to ensure a uniform transmission of monetary policy to all member states, its effectiveness could be limited, especially when buying debt from countries such as Germany and France. In this sense, A decrease of types by the ECB would relieve the financial burden of public debt issuance in these European powers.
The market has already greatly discounted the decreases of types in the US. And a possible reduction in December by the ECB, although the latter with less certainty. Therefore, A significant stock market is not expected. However, there is a risk that the message behind these types of types will be interpreted as a sign of recession or a more accelerated economic cooling than provided by central banks. If the justification of the decrease of types is based on unfavorable economic data or the need to avoid a recession, stock markets could experience falls instead of rebounds.
As for fixed income, the measures of the central banks will mainly impact the middle and long deadlines, which are more sensitive to interest rates, in the opinion of Carlos Arenas. Although a reduction of types usually generates greater profitability in fixed income, the control of the ECB and the Fed is limited to the short term. If the macroeconomy worsensas seen in France and Germany with the increase in financing costs, ECB type cuts could have a long -term limited effectwhere profitability could continue to increase, causing falls in fixed income assets in the medium and long term. To protect yourself, it is recommended to invest in shorter terms, where type drops could be beneficial.
It also indicates, that the federal reserve types is already discounted. However, if the Fed made another drop in December or a more pronounced reduction, the depreciation of the dollar against the euro would be even greater. A stronger euro would make exports of the European Union difficult, despite the fact that much of its exports are of high added value, which mitigates the impact of a significant appreciation of the currency. Although no currency forecasts are made, Carlos Arenas suggests the possibility that the euro-dollar torque reachs levels of 1.18 or even 1.20, which would imply an even greater depreciation of the dollar against the euro.