The EUR exchange rates were buoyed late last week as Draghi addressed the financial media. As many anticipated interest rates remained flat at 0.00%, whilst this was a foregone conclusion, market makers and investors were looking for clues surrounding tapering and also the continually strengthening Euro and its potential effects on the Eurozone’s economy and export business.
Draghi- head of the ECB confirmed that tapering would continue at a rate €30 Billion per month, falling from €60 billion recently. This asset purchasing rate is intended to remain at these levels until September. Interest rates will remain at low until at least September, however, this could be extended. In all Draghi’s minutes were viewed as routine and nothing he covered surprised markets or tamed EUR exchange rates which gained against a basket of over currencies during the meeting.
When Draghi specifically commented on the strength of the Euro he described its strength as a ‘source of uncertainty’ and confirmed it would be monitored by the European central bank.
Investors interpreted his comments surrounding EUR exchange rates as a demonstration of a lack of concern. Put simply Draghi has used similar wording before and the comments have been treated flippantly and therefore have been interpreted as a major point of concern for the ECB. Which in turn saw a rise in EUR/USD and a significant weakening in the GBP/EUR exchange rate.
EUR exchange rates will almost certainly continue to rise, as the economy is more attractive to investors, there has been very little interference from the ECB and inflation should also improve.
Eurozone inflation lags behind the ideal level of 2% and is expected to only reach 1.2% in 2018 falling from last year. Draghi and ECB, however, remains upbeat and expects that Eurozone inflation will pick up. He justified his thoughts by saying that improving economic conditions had
“strengthened further our confidence that inflation will converge to close to but below 2 percent,”
With inflation data due just in a few days maybe he knows something we don’t…..
The GBP had seemed somewhat on the ascendancy. The month high touched 1.1499 propelled by renewed Brexit positivity. Pound exchange rates rose following comments from the French president Emmanuel Macron who stated that he saw no reason for the UK not being able to seal a bespoke arrangement, he also stated that he would also be more than happy to welcome the UK back into the European Union. From general standpoint, the pound has traded higher in recent weeks due to a more cohesive message from the UK and the European Union. The pound has unfortunately been unable to hold on to the highs achieved last week. Draghi’s routine comment have done very little to stop the high performing euro, the zone’s data remains strong and confidence in the EU is high.
Whilst recent data including better than expected preliminary GDP has done little to support the pound against EUR Exchange rates positive comments like those made by Emmanuel Macron will do more to influence the GBP/EUR than data currently.
The Euro has been raining punches on a continually weakening Dollar, touching a 3 year high this week. Investors are pouring into the euro and many now perceive the single currency as a safe haven. Incredible if you wind the clock back just a few years to a currency and economy which appeared on the brink. Following the ECB and Draghi’s comments, the EUR/USD spiked significantly moving from 1.2412 to 1.2504 breaking the phycological mark of 1.25. EUR exchange rates have retraced and currently sits at around 1.2373 a sure sign of profit selling.
The week ahead sees multiple releases of mid-tier data, these include preliminary GDP data from Germany and Spain. However, the data which will be more closely scrutinised will be the Eurozone Flash CPI reading. This surpasses its expected levels of 1.3% especially following Draghi’s more upbeat outlook on inflation.