The European Central Bank (ECB) has decided to hold interest rates at their current level for its fifth consecutive meeting. In a press conference, ECB President Christine Lagarde referenced the US Federal Reserve's own monetary policy, stating: "We are data-dependent, not Fed-dependent."
DZ Bank Head of FX and Monetary Policy Research Sonja Marten joins Yahoo Finance to discuss the recent decision from the ECB and how it impacts global markets.
In terms of the parity call and what investors should keep in mind for their portfolios, Marten states: "What's really important to understand is that as far as the FX [foreign exchange] market is concerned, this is all about relative performance. If you look, and I'm talking now really about fundamental growth, so if you look at Europe and you look at the data in recent months, been really, really poor. We have recession in Germany, things aren't looking good, but if you look at what the market is pricing in, that's already in the price and if you look at the US, the opposite almost is the case. What I'm saying is in terms of euro-dollar, while there's a lot going on right now... I don't think there's a driver here for euro-dollar to move significantly higher or lower lastingly, so we have a fairly flat forecast."
For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance.
MADISON MILLS: And I want to start on her reaction to what we heard from President Christine Lagarde this morning specifically calling out that the US and the Eurozone are completely different areas of the world. They're going to handle the path down to 2% completely differently. Do we buy that?
SONJA MARTEN: Yeah, I absolutely buy that. I mean, they're in very different positions right now. And I think she did point out, and I think it was an important point to make that when you look at the nature of inflation in the US and you look at the nature of inflation in the Eurozone, particularly in recent years, it was quite different.
And so she has to focus on what's happening here in Europe. And she definitely does not want to tie herself down to become entirely dependent on the Fed. So if the inflation rate continues to decline in Europe but for some reason not in the US, then that is still a good platform for the ECB to cut rates irrespective of what the Fed does.
SEANA SMITH: And Sonja, talk to us about the reaction that we're seeing play out in the FX markets because we had the US dollar once again rising against the euro. Not necessarily a massive surprise, but what does that then tell you about how high we could potentially see the dollar push and the fact that we could see the dollar remain at these elevated levels maybe for longer than we had initially anticipated?
SONJA MARTEN: Well, I mean, the dollar definitely benefited massively from the CPI reading you just mentioned. I mean, actually, when you look at the numbers when they came out, they weren't that much higher than the consensus. Really, the difference was really quite small, but there was a massive market reaction. And that just shows how nervous people have become.
I mean, when you think back a few months ago, people were betting on the Fed cutting, what, 175 basis points this year? I mean, there was people saying they have to start in March. And it seems like now we're going in the other direction, right? So people are now saying Fed's going to cut less. And in fact, there's a discussion, do they need to cut at all? Can they cut at all?
And that's definitely supporting the dollar. So if we see some more pricing out of rate cut expectations for the US, albeit maybe only temporarily, that's definitely supportive of the dollar. Having said that, a lot of the news has been priced in. I mean, in terms of growth, differentials, et cetera, that's old news. So I'm not buying the whole parity call thing at the moment.
MADISON MILLS: Well, let's talk about that. If you're not buying the parity call, for a retail investor listening to this, what do they need to understand about what the continued bifurcation of the dollar and the euro would mean for their portfolios? Regardless of whether or not we are focusing specifically on FX here, just in general, what should retail investors know about the lack of parity for those two currencies?
SONJA MARTEN: Well, I think what's really important to understand is that as far as the market is concerned, this is all about relative performance, right? And if you look-- and I'm talking now really about fundamental growth. So if you look at Europe and you look at the data in recent months, it's been really, really poor. We have recession in Germany. Things aren't looking good.
But if you look at what the market is pricing in, that's already in the price. And if you look at the US, the opposite almost is the case. So what I'm saying is that in terms of euro/dollar, while there's a lot going on right now, there's a lot of discussion and debate about central banks and foreign monetary policy, actually, I don't think that there is a driver here for euro/dollar to move significantly higher or lower lastingly.
So we actually have a fairly flat forecast around 108, which looks really boring. But all that's saying is that we're going to probably be quite volatile. But I don't see 120, and I don't see parity. And that's the important point. That would only change maybe if Donald Trump does become president, in which case we have to make a new forecast. But in our base case scenario, that's not the case.
SEANA SMITH: All right. Sonja Marten, always great to speak with you. Thanks so much for making the time. DZ Bank head of monetary policy and FX research. Thanks, Sonia.
