Fighting euro strength

Yesterday, the single currency appeared to be on a relentless push towards the 1.40 level on EURUSD before Draghi put his oar in. The ECB President suggested that the ECB’s policy of forward guidance may help to weaken the currency and lower real interest rates, which had the impact of knocking around 60 pips from the currency at the close of European trade. A stronger currency has the effect of making exports more expensive and reducing the price of imports, bringing inflation lower. This is not what the Eurozone needs, with inflation already running below 1%. The timing of Draghi’s remarks is interesting, coming after the press conference last week where the market scaled back expectations of further easing to come. The impact of that has been seen in a stronger euro and it could be that the President wanted to push against this effect.

But words from central bank heads more often than not only have a transitory impact on a currency, because it’s underlying policy, flows and economics that determine value in the longer-term. As we’ve pointed out this week, the euro is benefitting from developments on the global sphere, more specifically events in China. This is having the effect of China moving away from dollars and (we can only speculate) into other currencies, including the euro. The other safe havens of the Swiss franc and yen have specific factors capping the upside; a cap for the Swiss franc and inflationary policies for the yen. As such, the upward pressure on the single currency could well continue once the impact of Draghi’s speech dissipates.

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