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U.S. Federal Reserve Chair Janet Yellen (L) walks with European Central Bank President Marlo Draghi at the Jackson Hole Economic Policy Symposium in Jackson Hole, Wyoming August 22, 2014. REUTERS/David Stubbs

MACRO VIEW COLUMNS: Talk is Cheap as ECB Pushes Back Against Strong Euro: Macro View


(Bloomberg) — Mario Draghi engaged in vigorous verbal intervention against a strong and rising euro last week, but the minimal reduction in the ECB inflation forecasts spoke louder than his words and the currency continued grinding higher. This trend looks like it has legs and that will make the job of exiting QE trickier.

  • Further upside is due. Euro calls trade in premium on all tenors up to nine months, and these bullish bets suggest the rally is far from over
  • Draghi took stronger steps than we’re used to by mentioning the euro’s strength and volatility in his opening statement and reiterating the point in the Q&A
  • But ECB staff forecasts for inflation were only minimally lowered, rather than reflecting a rethink of the inflation backdrop after the currency’s surge since the previous forecasts in June. That suggests they see domestic demand largely offsetting the drag from a higher exchange rate
  • Investors chose to focus on the modest CPI forecast rejig and EUR/USD has not really looked back after breaching 1.20
  • The QE recalibration (call it a taper, if you must) is clearly on, and we’ll probably learn more about it next month
  • If growth comes in anywhere near ECB forecasts, the macroeconomic backdrop should remain supportive of further euro gains
  • Politics has given the currency a big boost this year. A further lift may come from Germany, where a centrist, grand coalition government is looking increasingly likely. This would make euro-area reform more achievable
  • These developments will buoy the euro, especially if the contrast with the U.S. and U.K. on those fronts continues (composite PMIs may hold the clue here). Even a slow-and-steady wind-down to QE will become more challenging with a stronger currency and may prompt more aggressive jawboning from the ECB. Whether this can slow the euro’s ascent is debatable.
  • NOTE: Richard Jones is a markets strategist and blogger for Markets Live. The observations he makes are his own and are not intended as investment advice

To contact the reporter on this story: Richard Jones in London at To contact the editors responsible for this story: Ven Ram at Chris Kirkham, Lars Klemming

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