Why traders are ditching the euro

investmentnews.com:

Traders are abandoning the euro at pace as speculation grows the European Central Bank will struggle to tighten monetary policy further, even with inflation running far above target.

Data this week showed consumer-price growth re-accelerated in Spain and France in August, but the market is betting the ECB’s cycle of interest-rate hikes is as good as over. After a string of poor economic figures and comments from ECB member Isabel Schnabel on the dire outlook, the odds of a pause at the next meeting now hang in the balance.

Concern that Europe faces stagflation — a combination of weak economic activity and high inflation — has led many bulls to capitulate and dragged the euro lower. It fell as much as 0.4% to $1.0885 on Thursday, taking losses from a peak in July to more than 3%.

Analysts have cut their median forecast for the currency for the first time in six months, while firms including Bank of America Corp. and JPMorgan Chase & Co. see it falling toward $1.05, a level last seen during the banking crisis in March. BNP Paribas Asset Management says it could reach $1.02.

“The economy is clearly weakening, but core inflation remains stuck. If the weakness we have seen so far is not enough to bring inflation down, the economy needs to weaken even more,” said Athanasios Vamvakidis, head of G-10 FX strategy at Bank of America. “That’s the main concern for the euro.”

Back in January, when inflation had just peaked at double digits and the ECB hiking cycle was in full swing, several analysts were bullish. Both leveraged funds and institutional investors have held a net long position on the euro for nearly a year, helping the currency steadily recover from a two-decade low reached in late 2022.

Now though, the outlook is far