The ECB releases its Financial Stability Report, highlighting the challenges and opportunities ahead. What does the report tell us about the EUR/USD exchange rate?
The much-awaited Financial Stability Report from the ECB has been published today. This is a highly-regarded report, released bi-annually. It offers a comprehensive look at the risks to financial stability and the overall financial system, going beyond Europe’s physical borders and interpreting conditions in the global economy as well.
The release date of the Financial Stability Report is tentative, and the market participants had been expecting it for more than a week. The reason for the delay comes from the complexity of the report, and the timing could not be better; with euro sentiment in the market feeling positive.
Rising Yields in US Noted by the ECB
The report covers areas such as the economic recovery in Europe, corporate solvency developments, and even climate change. But it also looks at how the US, still the largest economy in the world, performs.
It is well known that when the US economy performs well, there is also a positive impact for its major trading partners. Therefore, the ECB acknowledged the rise in US yields as a major sign of the business cycle turning expansionary again. On the flip side, the ECB sees considerable slack in Europe, despite the economy being resilient to lockdown measures.
However, the increased vaccination pace against COVID-19 offers hope and optimism for a route out of the pandemic, despite weaker balance sheets and higher debt. The ECB also triggers a warning that some risks have clustered in some sectors and countries in Europe. Also, it noticed that while bank valuations improved throughout the financial sector, profitability remains an issue.
An interesting take of the ECB’s report may help to explain the recent price action seen in the currency markets. The ECB acknowledged that US growth prospects have improved, while European ones have moderated.
Normally, such a development should trigger a stronger US dollar and weaker euro reactions. Yet, the market did exactly the opposite – it sold the US dollar against the euro quite aggressively over the last couple of months.
The explanation comes from the difference in the monetary policy between the two major central banks. The next meetings on both sides of the Atlantic are crucial for the EUR/USD exchange rate in the months ahead – and for the two economies as well.