Mark Gilbert is a Bloomberg Gadfly columnist covering asset management. He previously was a Bloomberg View columnist, and prior to that the London bureau chief for Bloomberg News. He is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”

Marcus Ashworth is a Bloomberg Gadfly columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.

European Central Bank President Mario Draghi is discovering that exiting quantitative easing is harder than introducing it.

The more the euro rises, the more downward pressure it puts on inflation, making it harder for the central bank to taper its bond-buying program, which in turn boosts the euro. It's a vicious circle, driven largely by the improved economic outlook for the bloc.

Better Outcomes
Since the economy started growing again, euro zone GDP has typically been revised higher after its initial release
Source: Eurostat via Bloomberg

The central bank's newest growth predictions, released Thursday at the press conference following its latest monetary policy meeting, gave traders every reason to keep buying euros. While its growth forecasts for 2018 and 2019 were left unchanged, this year's projection was raised to 2.2 percent from 1.9 percent at mid-year.

A Better 2017
The ECB's growth projections
Source: ECB

By contrast, the ECB's inflation forecasts for next year and the year after were revised lower, which Draghi attributed largely to the rising euro.

Lower for Longer
The ECB's inflation projections
Source: ECB

Those 2017 projections were based on the euro being worth about $1.13, while the subsequent years assumed a rate of $1.18. The currency is even stronger now, suggesting even those inflation forecasts will prove to be overly optimistic.

Draghi made a half-hearted attempt to talk the currency lower. "Recent volatility in the exchange rate represents a source of uncertainty which requires monitoring with regards to the medium-term outlook for price stability," he said. That wasn't enough to dissuade traders, who drove the currency past $1.20 for only the second time this year.

Breaching $1.20
The euro is up by more than 14 percent against the dollar this year
Source: Bloomberg

Draghi was quick to defend the flexibility of the Asset Purchase Program, stressing it has shown it can deal with the challenges. No doubt he was referring to the recent overbuying of Italian and French bonds relative to the capital key, the formula that determines how much of each euro nation's debt the ECB can buy. He alluded to other possibilities, while neatly deflecting the thorny question on the scarcity of bonds available to buy.

He referred to widening of the eligible bond universe -- though he skirted a question on other asset classes. Further deviation from the capital key can offer some marginal relief but cannot address the overall scarcity dilemma.

The other option would be to not reinvest maturing holdings. Next year this would affect 1.35 billion euros of German, French, Italian and Spanish bonds. These are surely all up for discussion at the October meeting, when Draghi said the bulk of the decisions will be made.

Arguably, a stronger currency is a nice problem to have, reflecting investor confidence in the growth outlook. But with the hawks on the ECB itching to take their collective foot off the monetary accelerator, there's scope for some strong disagreement about what QE should look like next year, once the current 60 billion euro ($72 billion) per month bond buying program has expired.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Mark Gilbert in London at
Marcus Ashworth in London at

To contact the editor responsible for this story:
Jennifer Ryan at