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Jackson Hole Jitters: Why More Euro Weakness Against Pound Sterling and US Dollar is Likely

Mario Draghi Jackson Hole

The British Pound and US Dollar are seen recovering against the Euro thanks to developments concerning the European Central Bank.

The Euro pared some of its recent gains as some in the market "reset their lofty expectations for the ECB to soon roll back monetary stimulus," notes Joe Manimbo, an analyst with Western Union.

Reports out today suggested ECB President Mario Draghi would not use next week’s platform at the Federal Reserve of Kansas City's Economic Policy Symposium in Jackson Hole to choreograph an imminent reduction in stimulus.

"The secret sauce behind the Euro’s outperformance this year has been expectations the ECB would start to unwind stimulus sooner rather than later with the bloc’s economy rebounding at a steady clip," says Manimbo.

Draghi will be among the central bank leaders to speak at the Kansas Fed's annual summer conference on August 24-26 in Jackson Hole, Wyoming.

In the past Draghi has used the symposium to signal major changes in ECB policy and naturally parallels were being drawn to an expected imminent wind-down in the ECB's stimulus programmes.

At the 2014 Jackson Hole conference stated that the ECB stood ready to use “all the available instruments” to lift inflation expectations. Draghi’s statement then was widely read as a signal that the ECB was getting ready to launch QE.

For the Euro, this is potentially an important signalling event. The Euro "dipped in the wake of news headlines that ECB President Draghi would not announce any new policy message at the Jackson Hole seminar next week. An important driver of Euro strength since the spring has been the growing expectation of imminent ECB policy normalisation," say Societe Generale in a flash comment.

While the report on Draghi's intentions remain unofficial, we would suggest the report has fired a shot of caution into the currency market's approach to the single currency which has been on a tear higher lately.

"If true, then the delay should lead to a deeper near term correction in the Euro as it means that balance sheet changes won't be announced until the September ECB meeting," says Kathy Lien, Director at BK Asset Management in New York.

Despite the Euro's recent setbacks, it does remain bullishly aligned on multiple timeframes:

The Pound to Euro exchange rate is seen at 1.0949 at the time of writing, down from a one-month high of 1.1386.

The Euro to Dollar exchange rate is seen at 1.1770, up from a one-month low of 1.1417.

However, analyst Viraj Patel with ING Bank N.V. believes the Euro will go lower befor it goes higher:

"Since the July ECB meeting, we have been arguing that markets might have got ahead of themselves when it comes to pricing in the ECB's next steps; less aggressive expectations over the timing and pace of QE tapering chimes with our message that EUR/$ will first move lower before moving higher from these levels."

So this whole Jackson Hole issue might weigh further on the Euro.

"While the EUR has so far shown the resilience of a boxer refusing to go down despite taking a few big hits, we believe that signs of a more cautious ECB over the coming weeks may see some of this resistance fade," says Patel.

But, others believe any weakness offers an opportunity to buy.

Morgan Stanley’s view is that this messaging was to reduce volatility and expectations in the market.

“The ECB is still working through its economic forecasts for the next update on September 7 and in our view is going to hold off from announcing tapering until the October meeting,” says Hans W Redeker, head of FX research at Morgan Stanley in London.

Even the suggestion that the tapering announcement is only due in October might disappoint Euro bulls with many eyeing the September meeting for such a call.

“The headline doesn’t rule out Draghi being asked about currency strength and talking about it in the context of inflation expectations as that would technically not be a policy message. We would still use any EUR dip to buy,” says Redeker.

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What is the Jackson Hole Economic Symposium?

Each year since 1978, the Federal Reserve Bank of Kansas City has sponsored a symposium on an important economic issue facing the U.S. and world economies.

Symposium participants include prominent central bankers, finance ministers, academics, and financial market participants from around the world.

The participants convene to discuss the economic issues, implications, and policy options pertaining to the symposium topic. The symposium proceedings include papers, commentary, and discussion.

The 2017 Economic Symposium, "Fostering a Dynamic Global Economy," will take place Aug. 24-26, 2017.  (The program will be available at 6 p.m., MT, Aug. 24, 2017).

 

 

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