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Poll: Investors are betting the euro will continue to fall to $0.9

 Poll: Investors are betting the euro will continue to fall to $0.9

The European Central Bank's battle to regain its credibility with financial markets is becoming more difficult.

After a week that saw a new crisis in Rome, readers of MLIV warned of the dangers of Italian debt hitting the danger zone again, in the same way that the impending recession intensified the euro's agonizing decline to levels that were not possible Imagine it before.

Only 16% of 792 respondents in the latest Pulse survey expect Europe to avoid economic downturn in the next six months, with 69% betting that the single currency will fall to $0.9 instead of returning to $1.1.

To make matters worse, the political storm in the eurozone's third largest economy may spur a new era of market fragmentation. About 21% of MLIV readers believe the spread between Italian and German 10-year bonds should quickly worsen to more than 500 basis points, the highest level since the debt crisis in 2012, before the European Central Bank intervened.

Altogether, 41% of those surveyed, including portfolio managers and retail traders, see a debtcisis within the next six months, in a massive shift from the era of negative yields that swept the region as recently as early January.

These warnings could not come at a worse time for the European Central Bank than now. He appears ready to raise interest rates this week at long last, just as Russia threatens to escalate its energy crisis with inflation already at record levels.

gas rationing

Craig Inches, head of interest rates and cash at Royal London Asset Management, said: “I think the expectations of a recession have escalated very quickly because of the potential for 'rationalization' of gas, and if that happens, you could see a fiasco. Lots of companies."

High price pressures have taken a toll on households and businesses. Concerns are now growing because Russian gas deliveries are largely halted once maintenance on a major pipeline ends around July 21. The same day will see the European Central Bank raise interest rates for the first time in more than a decade, with the possibility of unveiling a new policy tool to fix the growing gaps in the bond market.

Last month, the central bank was forced to pledge new support after the yield on Italy's 10-year debt skyrocketed, exceeding the 4% barrier. With the ruling coalition led by Prime Minister Mario Draghi fragmenting, the challenge facing those in charge of monetary policy is becoming increasingly difficult.

According to Bloomberg Economics: “If the political situation turns hostile, and the new Italian government cannot agree on a path forward with the European Commission, the ECB cannot realistically be expected to intervene. Given that it still has to tackle inflation, The result will be fragmentation, and possibly crisis."

Christine Lagarde, president of the European Central Bank, has indicated that the support willbe implemented if borrowing costs for weaker countries rise too much or too quickly, and more bond purchases will be required. Economists polled by Bloomberg expect the liquidity created by those purchases to be reabsorbed in a process called sterilization.

In fact, the crisis instrument is designed as a hoax, a signal that the monetary authority will do whatever it takes to prop up the single currency bloc, leading to a situation where it does not actually need to buy any bonds.

450 basis points

Nearly half of those polled by MLIV see the ECB step in once Italy's yield premium to Germany reaches 450 basis points or more, exceeding the 250 basis point limit that analysts mentioned earlier this year.

The good news is that 59% of respondents said they do not expect a debt crisis in the eurozone in the next six months. The majority of respondents consider that cutting off gas is the most likely motivating factor if things go wrong. Only 18% of them indicated that the ECB's use of a disappointing anti-fragmentation tool would be the direct cause of any debt crisis.

The euro's historic pain bout

But Russian energy giant Gazprom PJSC, which has already reduced supplies via the Nord Stream pipeline to just 40% of capacity, has hinted at further disruptions to exports. In contrast, investor confidence in the German economy has fallen to its lowest level since 2011, with Deutsche Bank AG predicting that Europe's largest economy will shrink by 1% in 2023.

Three-fifths of those surveyed believe the European Central Bank will pause interest rate hikes in the event of a disaster with Russia's halt to gas supplies. This is a measure of relief that Lagarde and her colleagues will avoid a worsening economic downturn in the event of such an energy shock.

Whatever happens, the EUR's historic bout of pain is set to continue. Strategic analysts at Nomura Holdings Inc., UBS Group AG and BCA Research Inc. see it falling to $0.9 by winter in a worst-case scenario, Reflecting the view of most MLIV readers, a recession is more likely than a recovery.

All this indicates that this year's stock volatility is set to continue, as participants in the...

Concerns dominate investors over the pace of interest rate hike by the European Central

Investors are concerned that the European Central Bank is changing the path of interest rate hikes even before it starts to implement them.

Facing the fastest rate of inflation since the euro, officials plan to start a "sustainable" cycle of raising interest rates next Thursday by a quarter of a percentage point, for the first time since 2011, as the stimulus years finally come to an end.

But with traders absorbing a potential shutdown of Russian energy supplies to Europe, a new political storm in Italy, and the economy teetering on the brink of recession, expectations about how far the European Central Bank can go are already dwindling. The bets for a drop in the euro are close to the levels recorded during the outbreak of the epidemic in 2020.

The European Central Bank is already lagging behind the Fed in raising borrowing costs, as it faces the strongest price hike in a generation, a divergence that has pushed the euro below parity against the dollar for the first time in two decades during the week.

The shock from the halt in gas flows and the risks of a slower pace of monetary tightening are sending the single currency (euro) to a low of $0.9, according to Nomura Holdings Inc and BCA Research Inc.

Under this scenario, strategists at UBS Group AG expect 10-year bond yields to reach 0% by the end of the year instead of 1.1% currently, ending a short period of positive returns.

The European Central Bank's scheduled rate hike next Thursday would bring the deposit rate to minus 0.25%.

For Dominic Banning, chief foreign exchange analyst at HSBC Holdings Plc, the European Central Bank may struggle to make significant progress over the coming months.

“You would have thought they (ECB officials) could get to 0.5% early next year, but the window is closing very quickly,” Banning said. “Europe is slowing down no matter what the ECB does.”

Traders are now estimating that the ECB will raise rates by 155 basis points (1.55%) by the end of the year, down from a peak of over 190 basis points (1.90%) in mid-June.

While there have been some calls from within the central bank to start taking a more aggressive move to raise rates by half a point, this is unlikely, as it would conflict with guidance and could damage credibility.

A rate hike of this magnitude remains the base case for September, with traders' focus shifting to what comes next.

The key factor for how the European Central Bank will move forward will be the unveiling of a new tool to defuse undue tensions in government bond markets as borrowing costs soar.

Read also: Lagarde: The “European Central” mechanism will be activated if the spreads widen

Work has been intensified on the supportive instrument, expected to be unveiled at this week's meeting, which kicked off last month after a jump in debt-laden Italy's bond yields sparked memories of the eurozone sovereign debt crisis.

“What the market wants is concrete confirmation about the instrument,” said Gareth Hill, portfolio manager at Royal London Asset Management. “If the ECB does not provide enough details, it could be scary.”

The scope for disappointment is high, with Italian Prime Minister Mario Draghi offering to resign, making sentiment even more sensitive.

The spread between the country's 10-year bonds and Germany's is currently around 215 basis points, the highest in a month.

In a report to clients, Commerzbank AG strategists said failure to offer a "comprehensive and credible" instrument would widen this gap. Strategists expect the spread to retest this year's high of 240 basis points.

Investors are equally concerned about the future of energy. The continent's economic fortunes depend on whether natural gas supplies from Russia will resume after maintenance of a major pipeline due to finish next Thursday, while growth forecasts in the eurozone are already being lowered.

The European Commission said this week that the region now faces "much slower" expansion, a larger and more permanent cost-of-living shock than it did two months ago.

The euro reflects this bleak outlook, as its decline has complicated the European Central Bank's battle with inflation that is now more than four times its 2% target.

Central Bank of France Governor Francois Villeroy de Gallo said that ECB officials are watching the decline due to its impact on prices.

The overall picture amounts to a "toxic mixture" for the European Central Bank, which, despite initiating rate hikes four months after the Fed's move, may stop monetary tightening early, according to Alex Brazier, vice president of the Investment Institute. Institute) of BlackRock.

"We expect the energy shock to affect demand in the eurozone much more than it does in the US," Alex told Bloomberg TV.

He added: “The European Central Bank will at some point shift its focus away from its determination to raise interest rates this year toward eventually aligning with inflation.