The ECB cares more about the change in the euro’s value than the actual level because that’s what affects inflation most. So, while it was ECB President Mario Draghi’s reference to “tapering” bond purchases in June that propelled the euro to its best level of the year, it has been the subsequent cautious approach to tapering that has stopped its advance.
The question now is not so much about the speed at which the ECB will move (it is committed to buying EUR30bn per month until Sep'18), but how far into the future the market will look.
In the age of low rates, the FX market clearly looks further forward, discounting the destination of policy more than the short-term path, but that still leaves the euro looking stronger than can easily be justified by current levels of policy rates on bond yields, even if the strength of the economic recovery provides justification enough.
The euro’s rise from here will be probably be uneven and, on average, slower than the initial recovery.
The question now is not so much about the speed at which the ECB will move (it is committed to buying EUR30bn per month until Sep'18), but how far into the future the market will look.
In the age of low rates, the FX market clearly looks further forward, discounting the destination of policy more than the short-term path, but that still leaves the euro looking stronger than can easily be justified by current levels of policy rates on bond yields, even if the strength of the economic recovery provides justification enough.
The euro’s rise from here will be probably be uneven and, on average, slower than the initial recovery.
