Euro Weakness Deepens on Debt Contagion Fears and Dollar Demand
Societe Generale analysts have noted a renewed weakness in the Euro (EUR), driven by widening European debt spreads and strong US Dollar (USD) demand. This pressure has pushed the EUR/USD exchange rate below 1.12, marking the lowest level since May 2025. The decline contrasts sharply with the European Central Bank's (ECB) technical assumption of 1.16 for the years 2026-28, raising concerns about the currency's impact on inflation and monetary policy.
The depreciation of the Euro complicates the ECB's inflation outlook, as higher energy prices and a weaker currency could exacerbate inflationary pressures. Analysts suggest this could spark a debate within the ECB about the uneven transmission of monetary policy and the need for non-standard tools to address the divergence.
Speculative positioning in Euro futures has also turned short, adding to the downward pressure. Analysts question how long it will take for ECB officials to publicly support the Euro to slow its decline. Elevated oil and natural gas prices are expected to further squeeze industrial companies and reduce real disposable income for households.