Home Daily Commentaries ECB officials fear increased military spending may reignite inflation

ECB officials fear increased military spending may reignite inflation

Conor Fleming
Written by
Conor Fleming

Conor Fleming

OFXpert

With 30 years of experience in the foreign exchange world, Conor spearheads initiatives to encourage businesses in Germany, Switzerland, and Austria to hedge their foreign currency risks with OFX.

| Friday 21 February, 2025

Daily Currency Update

In Europe the prospect of increased military spending is keeping bond yields firm. Hawkish defence spending rhetoric is also having an effect on Sovereign spreads over Bunds with Italy / Germany spreads trading at 109 basis points. Consequently there is a growing feeling that Europe will need to issue more debt in order to be able to finance military spending. Although military spending will be inflationary, markets continue to push expectations for interest rates to be lower at 2% by the end of this year.

The UK are anxiously watching European bond markets to see if their recent sell-off accelerates as this may make monetary policy very tricky for Ms. Reeves. The UK are due to give a spending update on March 26th and need to argue how, if gilt yields are pressing recent highs when they give the update it will mean that the Chancellor will need to either deliver deeper spending cuts or UK asset markets could fall if markets do not believe Ms. Reeves has a credible plan.

Raphael Bostic, President of the Atlanta Federal Reserve, still sees room for two more rate cuts in the US this year, though much depends on evolving economic and geopolitical conditions. He still thinks the biggest risk to the US economy is inflation, 2% is the target and “they are not there”. He added that “a slowdown in the economy because of policy shifts is a material concern, but broadly businesses expect 2025 to be a solid year”.

 

 

Key Movers

European Union trade chief, Maros Sefcovic, said yesterday that his top priority in trade talks with Donald Trump’s administration is to avoid a period of economic pain for both sides from unilateral US tariffs and EU countermeasures. Sefcovic, citing the potential global spill-over effects of tensions between the EU and US, said it is incumbent on both sides to find a mutually agreeable solution.

The Pound edged up yesterday as traders await UK data on consumer spending and business activity after this weeks higher than expected inflation print complicated matters for the Bank of England. Market players will be closely watching the aforementioned economic releases later today for guidance on the strength of the UK economy. Interest rate differentials presently support the Pound as investors are trimming expectations for rate cuts in the UK this year.

In the US yesterday St Louis Fed President, Alberto Musalem, warned that rising inflation expectations combined with stubborn stagflation could create a double challenge for the US economy. There is assurance inflation is moving back to the Fed’s 2% target but patience is required to confirm this before further easing of borrowing costs. He confirmed that the Fed’s baseline view is for inflation to return to the 2% target but upside risks remain high.

 

Expected Ranges

  • GBP/USD: 1.2650 - 1.2705 ▲
  • GBP/EUR: 1.2050 - 1.2100 ▲
  • GBP/AUD: 1.9815 - 1.9865 ▲
  • EUR/USD: 1.0475 - 1.0530 ▲

Written by

Conor Fleming

OFXpert

With 30 years of experience in the foreign exchange world, Conor first embarked on his financial career journey as a trainee dealer in BNP Paribas in the early 90s. His professional journey also took him to New York, where he assumed the role of Head of Sales with an Irish bank for a few years. During his tenure at both banks, he was invited to several interviews on Irish television to discuss market turbulence, the factors driving volatility and insights into what could be expected as events unfolded.

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