ETF Securities comments on outlook for the euro

Jul 24th, 2017 | By | Category: Alternatives / Multi-Asset

By Martin Arnold, global FX & commodity strategist at ETF Securities. ETF Securities offers a range of foreign exchange ETPs including a range of products offering either long or short euro exposure versus the US dollar, British pound, or G10 currency basket.

ETF Securities comments on outlook for the euro

ETF Securities sees the near-term euro strength faltering and moving lower.

European Central Bank (ECB) President Draghi wants to engineer a smooth transition away from ultra stimulative monetary policy…but not too soon, because inflationary forces remain depressed. The problem is the strength of the euro, which further depresses inflation. The ECB wants a weaker euro…

At the last ECB press conference, Draghi commented that there were ‘two…observations of this nature ([on] the link between the asset purchase programme and the inflation convergence), but there wasn’t any discussion…on normalisation’. This very measured language highlights the mindset of policymakers: cautious to ensure that inflation and wage gains are gaining a solid foothold. Inflation across the eurozone was flat in June, contributing to a 1.3% annual growth over the past year. We must remember the mistake that the ECB made in raising rates in 2011, only to have to cut rates before year-end 2011.

In this way, the ECB remains conservative with their communication on the need for tapering, with President Draghi noting that ‘discussions should happen in the fall’ because ‘we are not there yet’ regarding inflation and price stability. President Draghi does not want a taper tantrum to push borrowing costs sharply higher. But a weaker euro would be of assistance, both for lifting inflationary forces and for boosting economic demand.

We feel that the market has misjudged the reticence of the ECB and that confidence in aggressive tapering in coming months misguided. In turn we feel the euro bounce during the press conference will be transitory. Indeed, the long euro trade is overcrowded, with futures market positioning at the highest level in over six years. In the face of weak inflation pressure, there are downside risks for the euro. Meanwhile, option pricing shows that optimism, albeit trending higher, is much more subdued than within the futures market.

As a result, we continue to expect the near-term euro strength to falter and to move lower until a more urgent need for tighter monetary policy for the eurozone becomes a more strongly voiced position.

(The views expressed here are those of the author and do not necessarily reflect those of ETF Strategy.)

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