Digital currencies: ECB to launch the e-euro

• The European Central Bank is set to launch a digital version of the euro (EUR) called the e-euro.
• The e-euro has been labelled as essential for the digital age and looks to become a swift and secure payment method across the Eurozone.
• Federal Reserve Chair Jerome Powell says digital currencies will undercut the need for cryptocurrencies like Bitcoin.
• Denis Beau, First Deputy Governor of the Banque de France, debated the risks and prospects of the digitalisation of finance.
• UK inflation data provided only a temporary lift for the British pound (GBP).
• The US dollar (USD) took a hit after Fed Chair Jerome Powell said the US economy wasn’t ready for monetary support to be tapered.
• Bank of Canada (BoC) cuts bond purchases to CAD 2 billion.
• The British pound to Australian dollar (GBP/AUD) exchange rate rises to a one-year high.

The European Central Bank (ECB) is set to launch a digital version of the euro (EUR), known as the e-euro. Keeping a close eye on the progress of cryptocurrencies such as Bitcoin, the ECB noted how the coronavirus pandemic had created a shift away from physical cash.

The e-euro aims to launch within the next five years and looks to become a secure payment method across the Eurozone.

ECB President Christine Lagarde said the Bank aimed to ensure that European citizens and businesses had access to the safest form of money in the digital age.

The e-euro would consist of an electronic version of euro (EUR) notes and coins, stored via a digital wallet with the ECB rather than a commercial bank. This setup is considered more secure than traditional banking methods, with commercial banks at greater risk of going bust and Bank accounts being hacked by cybercriminals.

Fabio Panetta, a member of the ECB’s Executive Board, stated that the e-euro would not replace physical cash but would complement it to make secure yet straightforward payments. A digital currency would also create competition with card companies like VISA and payment services like PayPal, both of which have no solid European contenders so far.

It’s important to note that one e-euro would be equivalent to one physical euro (EUR). Further details regarding the development of the e-euro are limited, with the ECB stating that they would continue to observe technology over the next two years to help advance the digital currency, looking at design and distribution.

The idea of the e-euro was first sparked when the ECB discovered that Facebook was looking to launch its own digital currency known as the Diem in 2019. Since then, other Central Banks have also looked into creating their own central bank digital currency (CBDC). For example, the Chinese Central Bank is investigating with renminbi, whilst the Bank of England (BoE) is looking into a potential ‘Britcoin’.

Although the development of digital currencies is undoubtedly trending, they also face an uncertain future. For example, Deutsche Bank analyst Heike Mai noted the challenge of European citizens being asked to switch to a new payment method, which does not differ significantly from existing ones. Alternatively, if digital currencies prove more popular due to security reasons, this could weaken commercial banks. As a result, the ECB is already suggesting deposit caps for digital wallets at EUR 3,000.

German Finance Minister Olaf Scholz has welcomed the concept of a digital currency, stating that it was essential during the digital age and offered tremendous opportunities.

Jerome Powell says digital currencies will undercut the need for cryptocurrencies

As digital currencies increasingly become a popular prospect for Central Banks, Chair of the Federal Reserve Jerome Powell recently stated that digital currencies would undercut the need for cryptocurrencies and stablecoins. A stablecoin is a cryptocurrency that pins its value to a traditional currency such as the US dollar (USD).

Yesterday marked the first of Mr Powell’s two-day semi-annual testimony before Congress. During the testimony, Mr Powell agreed when asked if digital currencies would be a better alternative to multiple cryptocurrencies and stablecoins within the payments system.

There are currently over 8,500 cryptocurrencies, with a market value of USD 1.4 trillion. At their highest, cryptocurrencies had a collective value of USD 2 trillion.

Mr Powell confirmed that the Federal Reserve will examine the digital payments universe and will look to release a report of their findings during early September 2021. The Fed are sceptical that cryptocurrencies will become a primary payment vehicle in the US but said stablecoins could gain more acceptance.

There is currently no solid regulatory framework for stablecoins as there is presently with bank deposits and money market funds. Therefore, Mr Powell stated stablecoins need further regulation before taking prominence in the US financial system.

However, some Fed officials have been critical at the prospect of digital currencies, with Fed Vice Chair for Supervision, Randal Quarles labelling them as a novelty. Richmond Fed Bank President Thomas Barkin also argued many US dollar (USD) transactions are already digital, using services such as Venmo and that a US digital currency was not needed.

Although countries like China are ramping up their CBDC efforts, Mr Powell assured the US would not rush into any decisions in an attempt to play catch up.

First Deputy Governor of the Banque de France discusses digitalisation of finance

Denis Beau, First Deputy Governor of the Banque de France, discussed the risks and prospects this week of the digitalisation of finance.

Mr Beau was mostly optimistic regarding the prospect of digital currencies, highlighting benefits such as financial inclusion and smoother payment transactions. However, it was also noted that digital currencies created substantial competition amongst Central Banks with alternative payment systems.

However, a primary risk of financial digitalisation is that it can threaten the central role of national Central Bank currencies and the financial and monetary system of a particular country.

Echoing comments from Fed Chair Jerome Powell, Mr Beau said that Central Banks needed a solid regulatory framework. All countries must ensure that their regulations are robust enough to combat the challenges posed by stablecoins.

Mr Beau commented how banks that establish their own CBDC could help them adequately prepare for the future of financial digitalisation, reasserting their role as a stabiliser within the payment space.

The Banque de France has been heavily involved in the development of the e-euro, recently making cross-border experiment payments to the Monetary Authority of Singapore and the Swiss National Bank.

UK inflation data provided only a temporary lift for the British pound

News that UK inflation rose to 2.5% in the 12 months to June 2021 provided little support for the British pound (GBP), seeing a slight rise against the US dollar (USD) yesterday before stumbling towards the end of the trading session.

At the start of today’s trading session, the British pound to US dollar (GBP/USD) exchange rate was 0.12% higher at USD 1.3875.

UK inflation data also pushed the British pound to euro (GBP/EUR) rate higher but continues to linger around the EUR 1.17 mark.

The single currency was muted during the start of today’s trading session following underwhelming Eurozone industrial production data for May 2021. The figure went below forecasts from 0.6% to -1%, leaving euro (EUR) investors apprehensive about the future of the Eurozone’s industrial and manufacturing sector.

Maria Martinez, an analyst at MarketWatch, notes supply-chain disruptions have impacted production, particularly the motor vehicles sector. Moreover, these disruptions are unlikely to disappear until the end of 2021.

Although the UK economy is experiencing a boost from the lifting of COVID restrictions, the country is amid a third wave of coronavirus infections, casting a shadow over pound Sterling (GBP). However, despite rising COVID cases, the UK is predicted to avoid entering another lockdown for now due to the rapid rollout of coronavirus vaccines.

There was positive data regarding UK unemployment as it was revealed that payrolls increased by 356,000 in June 2021, an increase for the seventh consecutive month. Although a step in the right direction, payroll levels remain 206,000 below pre-pandemic levels.

The US dollar (USD) also took a tumble yesterday following Fed Chair Jerome Powell’s comments that the US economy wasn’t ready for monetary support to be tapered after US inflation hit a 13-year high in June 2021.

Today sees the release of US jobless claims for the week ending 9th July 2021 and day two of Mr Powell’s semi-annual testimony before Congress, both of which are likely to impact the Greenback further.

Bank of Canada (BoC) cuts bond purchases to CAD 2 billion

Aligning with market expectations, the Bank of Canada (BoC) announced that bond purchases would be cut to CAD 2 billion down from CAD 3 billion and kept interest rates unchanged at 0.25%. The Bank just justified the move by highlighting Canada’s continued economic progress, creating a more optimistic outlook for the Canadian economy.

However, the Canadian dollar (CAD) took a hit as the BoC revised their gross domestic product (GDP) growth figures for 2021 slightly lower to 6%. However, it’s anticipated that 2022 will see 4.5% growth and 3.25% for 2023, both upward revisions from April 2021 estimations.

The British pound to Canadian dollar (GBP/CAD) exchange rate rose to 11-week highs yesterday at CAD 1.7370 before dipping slightly to CAD 1.7335.

Canada is also seeing inflation levels surpass the BoC’s target rate, though the Bank considers the rise to be transitory and expects inflation to return to moderate levels during 2022.

Tomorrow will see the release of Canada’s employment change figures, which could provide some much-needed support for the ‘Loonie’ if data shows signs of improvement.

GBP/AUD rises to a one-year high

The British pound to Australian dollar (GBP/AUD) exchange rate has risen to a one-year high of AUD 1.86114 following the release of UK inflation data. However, the currency pairing has since retreated to AUD 1.857, with the ‘Aussie’ dollar reinforced by solid consumer confidence.

Australia’s Westpac consumer confidence index for July 2021 was forecast to decline by 2.2 points but instead increased by 1.6. The better than expected figures highlight that concerns of the recent coronavirus outbreak in New South Wales had not impacted the remainder of the country.

Risk appetite is likely to drive further movement in the ‘Aussie’ dollar. However, whether markets will be bullish due to high inflation data from the UK and US remains to be seen.