The Euro strengthened over one percentage point against the Dollar, hitting its highest level since January 2015, following yesterday’s European Central Bank (ECB) meeting, despite them leaving monetary policy on hold. The Euro also strengthened against the Pound, as ECB President Mario Draghi signalled a decision on their quantitative easing (QE) programme would likely come next month.
No changes to ECB policy – at least for now
The ECB kept monetary policy on hold as expected, confirmed that asset buys would continue at €60 billion per month at least until December, and said it could even increase or expand the asset purchases if needed. They upgraded their growth forecast for this year to 2.2%, saying “there was a general recognition of the progress made by the eurozone recovery. It’s robust, it’s broad-based, and it was recalled that six million jobs were created since 2013.”
They downgraded their medium-term outlook for inflation, mainly due to the stronger Euro, saying they take into account this element in their policy decisions. In the press conference, Draghi repeated their previous assessment that underlying inflation remains subdued and that a substantial amount of stimulus is still required.
On the Euro, he said “the recent volatility in the exchange rate represents a source of uncertainty which requires monitoring with regard to its possible implications for the medium-term outlook for price stability.”
Critically, they avoided directly targeting the strength of the Euro, or revealing any level that would prompt a change in strategy. As a result, the Euro remains desirable to investors on the foreign exchange markets, in anticipation of a reduction in stimulus in the near future due to strong growth in the first half of the year and a pick-up in inflation.
Strong Euro could hit growth and weigh on inflation
The ECB has recently expressed concerns that the current strength of the Euro could hamper the continent’s long-awaited economic recovery. A stronger Euro makes Eurozone countries less competitive at an international level as exports become more expensive, while imports become cheaper.
The increase in the value of the Euro also impacts inflation, making imported goods cheaper and is likely contributing to the Eurozone’s relatively low inflation. The current rate of annual inflation in the Eurozone is around 1.5%, still below the central bank’s target of around 2%
What’s next for the Euro?
Currency exchange rates are determined by relative values, and the Pound and the Dollar are currently both under pressure, which has in part allowed the Euro to rise as much as it has this year (up 14% against the Dollar and 8% against the Pound). The Pound remains weak due to the apparent lack of progress in Brexit negotiations. A number of factors are putting pressure on the Dollar, including political issues, natural disasters, geopolitical concerns and weak inflation.
If Europe continues to see faster levels of growth at a time of political calm, whilst uncertainty remains in the US and UK political climates, the Euro may continue to be seen as a relative safe haven. As Mario Draghi noted though, they are monitoring the Euro’s strength. They may well consider taking action to limit the Euro’s rise if they feel it will undermine their inflation and growth goals.
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