Euro Moves Far from Brutal

by Ashraf Laidi
Aug 17, 2017 21:18 | 6 Comments

Earlier today, euro suffered a minor bump on the release of the minutes from last month's ECB Governing Council policy meeting, which revealed growing concerns with a possible overshoot in the value of the euro. The full text was as follows: “While it was remarked that the appreciation of the euro to date could be seen in part as reflecting changes in relative fundamentals in the euro area vis-a-vis the rest of the world, concerns were expressed about the risk of the exchange-rate overshooting in the future.” Before we start speculating over when ECB policy makers may start jawboning the currency lower, it is worth reminding the times when the ECB warned over excessive euro strength:

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Euro Moves Far from Brutal - Trichet Intervention Aug 2017 (Chart 1)

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Euro Moves Far from Brutal - Euro Brutal Intervention 17 Aug 2017 (Chart 2)

Secular strength:  EURUSD is up 15% year-to-date, with headline and core inflation at 1.3% and 1.2% respectively. This compares to periods of higher levels of inflation and a secular bear market in the US dollar in each of the above 3 cases. EURUSD's ascent is in in part a result of USD weakness (USD is down against all major 10 currencies year-to-date), the euro is the 2nd strongest currency so far this year (behind the Swedish Krone), which means the strength is broad and secular. The same cannot be said about the euro's performance in 2004 and 2007, when it was surpassed by most commodity currencies.

What does this mean? The combination of broad euro strength so far this year and a rising trend in the core CPI reflects not only expectations of inevitable QE reduction, but also a broad upswing in economic activity and a notable curtailment in sovereign and corporate risk. The currency impact of any verbal intervention would be short-lived.

Comments (Showing latest 4 of 6) View All Comments
Zoo2u
Halifax, Canada
Posts: 0
7 days ago
Jun 15, 2018 5:21
I know this is old thread but the title somewhat fits....am I the only one that thinks the move in the EUR/USD today was brutal? Unjustified? Draghi says QE will end by Q4 and ECB will begin to raise rates next year. Plus he also was very positive about inflation, substantial progress, I believe we're his words and I believe he said economy has showed healthy growth....and with these words he got the euro to drop almost 300 points in like 12 hours?? Something doesn't add up. I've heard Draghi speak much more dovish than this, if this is even dovish talk at all, and the euro doesn't react like this...is it possible the ECB could interfere or manipulate the currency? The EU, I'm sure, is not happy with Trump and his tariff threats.Is it possible, the ECB could weaken the euro artificially in retaliation to Trump's trade threats? Making their exports more attractive. Is it possible? Does it even make sense to do that?..... Something doesn't add up. I'm missing something.
builderfx
london, Finland
Posts: 0
3 months ago
Mar 19, 2018 8:18
Political chaos and volatility returns.
http://buildadv.com/2018/03/17/return-of-volatility-amidst-political-chaos-and-uncertain-economy/

Major triangular consolidation seen across assets
Ashraf Laidi
London, UK
Posts: 0
6 months ago
Nov 28, 2017 0:59
In reply to ryan786's post
Hello Ryan,

Thanks for the comment and apologies for the late reply.

There are no plans for visiting Qatar, but this may change in Q2 2018.

Best

Ashraf
ryan786
Doha, Qatar
Posts: 0
10 months ago
Aug 25, 2017 9:04
Hi Ashraf, You are really and always so Succinct and meticulous in your explanation..it has been so useful. Thank you. By any chance, would you ever visit Qatar for any work purpose ?