Euro Exchange Rates Support Unlikely to Last
The euro has strengthened - but the ECB will not be happy with the strengthening of the exchange rate.
The euro came under pressure at the start of this week as speculation grew that the ECB would soon announce an expansion of its asset purchase programme (quantitative easing).
Any extension beyond September 2016 is seen as being incredibly euro-negative and traders cut back expsosure to the shared currency to limit any risk a potential announcement would carry.
However the ECB President, in an appearance before the European parliament, denied any plans for such a move were afoot.
Markets reacted aggressively:
The euro to sterling exchange rate broke back above the 0.73 level ensuring that a test of the 0.74 inter-month high remains viable at this stage.
The euro to dollar exchange rate meanwhile looks intent on attacking 1.14 resistance.
However we expect strength in the shared currency to ultimately be short-lived as Draghi did leave the door open to further action when he noted:
“Should some of the downwards risks weaken the inflation outlook over the medium term more fundamentally than we project at present, we would not hesitate to act. The asset purchase programme has sufficient in-built flexibility. We will adjust its size, composition and duration as appropriate, if more monetary policy impulse should become necessary.”
Latest Pound/Euro Exchange Rates
  | Live: 1.1452▲ + 0.08%12 Month Best:1.2162 |
*Your Bank's Retail Rate
| 1.1063 - 1.1108 |
**Independent Specialist | 1.1292 - 1.1337 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
Barclays have meanwhile told clients to be wary on the euro's strength as the ECB will ultimately enact measures to ensure it falls.
The bank see an extension to the asset purchase programme (quantitative easing) being announced as early as October. If the euro exchange rate complex fails to fall the ECB may even cut interest rates further in subsequent months.
The Bank of England will meanwhile be looking to raise interest rates soon, a move that will create a gulf in policy between the ECB and BoE. This gulf should allow the pound sterling to advance against the euro.
Praet Confirms More Quantitative Easing Possible
Despite the euro’s relief rally we are of the opinion that the ECB appears itching to expand its asset purchase programme - the message has been made quite clear by ECB Executive Board Member Peter Praet.
Praet has confirmed once more that the European Central Bank stands ready to expand its quantitative easing programme if need be.
Praet has been particularly vocal having made the assertion on a number of occasions.
The latest intervention comes in a speech made at the FIBI Annual Lunch in Dublin:
“Monetary policy will play its part for as long as needed, which means the full implementation of the asset purchase programme and, if necessary, adjustments to its size, composition and duration.”
However, the senior ECB board member did say that the ECB cannot do all the work and urged Eurozone government’s to make necessary structural reforms:
“But monetary policy can only do so much. It is for other policymakers to address the secular and institutional factors that are preventing a stronger and more sustained recovery. Efforts are now well underway. But longer they take, the higher the hurdles that all policymakers will ultimately have to climb.”
For us the rally in the euro looks knee-jerk as the message coming from the ECB is that more easing lies ahead.
