MW: Euro bulls just got a wake-up call from the ECB
The euro hit a four-month high versus the dollar earlier this week, but now some European Central Bank policy makers appear to be attempting to cool that enthusiasm.
A report by Reuters on Wednesday said policy makers appear to have been surprised by the reaction to what was viewed as an unexpectedly hawkish tone at their March meeting and are seemingly now trying to rein in expectations that a rate hike could come as soon as December.
See: Mario Draghi in no hurry to pull plug on ECB stimulus
The report, citing unnamed sources, said that some ECB policy makers are reluctant to make any changes to the bank’s policy statement in April because they feel markets misinterpreted their message in March by beginning to price in a rate hike by later this year. The central bankers were spooked by a subsequent rise in yields and want to reassure investors that their aggressive easing program is nowhere near the end, the report said.
The euro EURUSD, -0.2229% fell sharply on Wednesday and continued its decline on Thursday. It traded around a two-week low at $1.0744, down from as high as $1.089 earlier in the week.
“We’re seeing a correction from a rise in the euro that was maybe a little bit exaggerated. So I’m not surprised we’re seeing consolidation, but I don’t think this consolidation goes very far. Towards $1.06 we’d probably be buying,” said Vincent Chaigneau, global head of FX strategy at Société Générale.
The euro started to move higher earlier in March on a combination of factors: A more dovish-than-expected statement from the Federal Reserve pushed the dollar lower, and in turn sparked a euro rally. Fears that far-right candidate Marine Le Pen could win the French presidential election abated after Dutch voters rebuffed populist candidate Geert Wilders in the country’s general election.
And finally the ECB’s unexpected hawkish tilt in its forward guidance at its March 9 meeting. What really got investors wondering about the ECB’s tightening plans was the absence of its customary pledge that “if warranted to achieve its objective, the Governing Council will act by using all the instruments available within its mandate”. Since that meeting, markets started to price in a more than 50% probability of a rise in the deposit rate by December, up from just 11% a month ago, according to Bloomberg.
The ECB has previously stated it won’t raise rates until it winds up its quantitative easing program, which currently is slated to run until December this year.
‘We’ll be buying the dips’
But even if traders’ assessment of the March meeting was too hawkish, as ECB officials reportedly told Reuters, Chaigneau still sees a strong case for the euro in coming months.
“We’ll be buying the dips, but it’ll be a function of how much the ECB is looking to exit [its easing program] and how fast the Fed is tightening. We’re also looking to the French election, and if there’s no surprise there the euro will trade to the upside,” he said.
At Rabobank, senior FX strategist Jane Foley also agreed that this week’s euro weakness is likely to be short-lived. She noted that aside from ECB policy, “perceived political risk” has been a been a strong influence on the shared currency.
“The failure of populist Wilders to secure the right to form a government following the Dutch elections earlier this month and the reduction of perceived political risk in France have both been euro supportive factors,” she said in a note out on Thursday.
If Le Pen doesn’t win the French election this could “lead to further short-covering in the euro this spring and we retain our forecast of a move to $1.10, £0.89 by year end,” she added.
