Euro ignores ECB’s verbal warning, ends week near highs

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11 September 2017


The critical event of last week unfolded more or less as consensus had expected.

he ECB punted the decision on the tapering of sovereign bond purchases into the October meeting. It revised its growth forecast slightly up over the short term but, more critically, took down its inflation forecast. The more notable development was the force with which President Draghi pushed back verbally against a stronger Euro. The warnings fell on deaf ears, however, as trepidation over North Korea, the economic impact of the hurricanes and political concerns knocked the Dollar down against every major currency save the Korean Won.

The main event this week is Thursday’s Bank of England meeting. No action is expected, but we look to see some heated debate on the nature of above trend inflation in the UK and the best way to deal with it.

Major currencies in detail


Sterling last week experienced a rare bout of outperformance against both the Euro and the US Dollar. Positive surprises from both the manufacturing sector and the balance of trade undoubtedly helped.

However, we think markets are starting to price in the possibility of earlier than expected interest rate hikes in the UK. The recent plunge in the trade-weighted Pound will pressure already above-target inflation eve higher; Tuesday we should see the first evidence for this as August inflation data is released. The erosion of real wages brought about by high inflation will surely give ammunition to the hawks within the MPC, and we expect the recent rebound in the Pound against the Euro to continue.


The ECB confirmed near-universal expectations last week in delaying any decision on changes to its QE programme until the October meeting. However, both the Council’s statement and President Draghi’s post-meeting press conference surprised us with their explicit mention of Euro strength as a key element of uncertainty and a serious impediment to achieving the inflation target.

The ECB’s own, in our view, optimistic forecasts acknowledge that inflation at the extreme of the forecast horizon, the end of 2019, will remain considerably below target. Markets are for now ignoring the ECB’s concerns on Euro strength, but we expect further verbal intervention from ECB officials over the coming weeks to try and keep downward pressure on the currency. We are unlikely to see significant tightening of monetary policy as long as the Euro remains above 1.20.


North Korea tensions and Hurricane Irma sent investors running for the safety of treasury bonds, lowering yields and pressuring the Dollar. Relatively dovish speeches by Federal Reserve officials did not help the greenback.

This week, the Dollar should trade in response to the crucial inflation data on Tuesday, and the first estimates of Irma’s impact on short term economic growth. We note that expectations of significant fiscal policy changes are so low that any signs of an agreement in Congress could be very positive for the Dollar.