A strong Euro could complicate matters for the European Central Bank

Despite the ECB’s concerns, the Eurozone’s economic performance has been stellar this year – its best since the end of the financial crisis.

In the wake of the European Central Bank’s policy meeting providing short term optimism to the euro, the USD touched a 2-1/2-year low against the Euro on Friday.

When asked on when the ECB will potentially move towards its tapering plan, Mario Draghi, ECB’s President stated the bulk of these decisions will probably be taken in the coming month.

The comment was enough to make the euro bullish in its near-term outlook.

Draghi was quick to caution that the ECB has also have to take into account the weakening inflationary trend in Europe, a factor which has strengthened the euro, and has lowered EU’s inflation projections to reflect a firming of the common currency.

The ECB has also re-affirmed its go-easy policy of low interest rates and has even kept the doors wide open for boosting its bond purchase program, if required, despite the Eurozone’s best economic performance since the global financial crisis of 2007-2009.

“A large part of the euro’s gains is being driven by expectations towards ECB tapering. The market did not get the confirmation it expected regarding tapering, but it remains far from disappointed,” said Bart Wakabayashi, branch manager for State Street Bank and Trust in Tokyo.

He went on to add, “If euro strength is to continue, this may actually prompt the ECB to refrain from tapering. But as demonstrated time and time again, the market tends to get ahead of itself.”

The Euro has gained 1.7% against the dollar this week; it was up by 0.4% at $1.2069 after touching a high of $1.2090, its highest since January 2015.

According to Junichi Ishikawa, senior FX strategist at IG Securities in Tokyo, the euro “was bought on mention of tapering possibly starting in October. But the ECB sounded rather dovish overall and the euro probably should have been sold in response, particularly with German bond yields having fallen.”

“But the euro still managed to gain, thanks to the dollar’s underlying weakness. The dollar is under pressure from many fronts ranging from sluggish inflation, Trump risk and geopolitical concerns.”

Against the yen, the euro’s gains were more modest. It was a shade higher at 130.570 against the yen having risen by 0.2% overnight.

As for the sterling, the euro was up by 0.25% at 92.00 pence thus registering a 0.4% gain for this week.

For the greenback, noises from China-backed North Korea and with Hurricane Irma headed for Florida having caused havoc in the Caribbean, has compounded its problems.

The USD was down by 0.2% against the yen at 108.235 having dropped by 0.7% overnight; it also briefly touched its 10-month low of 108.050 against the yen.

The dollar index was down by 0.5% against a basket of 6 major currencies at 91.210 after touching a low of 91.082, its weakest since January 2015. It is on track to register a 1.8% weekly loss.


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