What now for the euro in the wake of the ECB?

The ECB failed to talk down the euro in a meaningful way, and given the signs at present, it looks like EUR/USD appreciation will continue.

European Central Bank (ECB)
Source: Bloomberg

The most recent meeting of the European Central Bank (ECB) included a discussion of tapering, with President Mario Draghi saying that preliminary talks had begun on the length and size of monthly purchases. In addition, the ECB upgraded its growth forecast to 2.2% for 2017, the strongest since 2007. However, the inflation forecast for 2018 was 1.2%, way below what was originally expected. There was, we are told, no real discussion on euro strength and how it altered their outlook, which somewhat contradicts what ECB ‘sources’ said beforehand.

Barring some kind of hawkish turn from the Federal Reserve, or a shift in market sentiment that causes the ongoing dollar weakness to reverse, the path for the euro against the dollar seems higher. Despite being given plenty of opportunity, Draghi did not make any reference to euro strength and whether it would need to alter policy or delay tapering as a result. This prompted the currency to move above $1.20 once more.

Since then it has fallen back, but only just below $1.18, and despite a stronger US consumer price index (CPI) reading, it seems unwilling to move further. Against the pound it has been a different story. Higher CPI, improved unemployment figures and an apparently more hawkish Bank of England (BoE), have pushed EUR/GBP back down to its lowest level since mid July. Dips in EUR/USD have been bought, but rallies in EUR/GBP are still being sold.

Looking towards the end of the year, we can expect seasonality to push EUR/USD higher. September tends to be a strong month for the pair, while October is usually weaker. But from November, the buyers take over, driving the pair higher through to December. Historically, EUR/GBP tends to do well in November and December too, so it will be interesting to see whether this slump in the pair can be reversed, particularly if the BoE keeps policy unchanged in its meetings until the end of the year.

In the wake of the ECB meeting, the euro seems almost destined to rise against the US dollar, but against EUR/GBP the picture is less clear. 

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This information has been prepared by IG, a trading name of IG Markets Limited and IG Markets South Africa Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. International accounts are offered by IG Markets Limited in the UK (FCA Number 195355), a juristic representative of IG Markets South Africa Limited (FSP No 41393). South African residents are required to obtain the necessary tax clearance certificates in line with their foreign investment allowance and may not use credit or debit cards to fund their international account.

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