Balancing act

Draghi Needs to Put the Euro in Its Place

The best thing for the future of ECB policy is if the currency stays in its current range.

Photographer: Alex Kraus/Bloomberg

Rather than looking at what investors expect, perhaps the better question is: What does the European Central Bank want to achieve out of its April 26 meeting? Sticking the euro in a box is the answer.

Currency stability helps its cause as it manages the delicate balancing act of bringing its QE stimulus packages to a close sometime this year. The Governing Council’s coordinated message – that ending bond purchases doesn’t need to be rushed – has helped take the wind out of the euro's sails. What officials need to do now is focus on keeping it in the range it’s already set this year. That should buy it time to steer the decision-making process over the summer.

Off the Top

Having twice exceeded 1.25 versus the dollar in February, the euro has lost 2.5 percent

Source: Bloomberg

So expect President Mario Draghi's answers at the press conference following Thursday's policy decision to carefully avoid putting the euro on a track to repeat last year’s performance, when its gain versus the dollar last year made it the best-performing G10 currency.

Back in the Pack

The euro is having a quieter year after rising about 14% vs the dollar in 2017, the most of the G10 currencies

Source: Bloomberg

That pickup created a drag on the region’s economic recovery, raising the worrying prospect that the ECB’s hard-fought stimulus efforts could go to waste. A rapidly rising currency undermines a recovery in exports, particularly for the region’s weaker countries – and the struggle may have already started. The euro area composite Purchasing Managers' Index dropped to 55.2 in March from February's 57.1, the biggest decline in six years.

A stronger currency also risks dragging down inflation when officials are already struggling mightily to stoke price gains. That would set the stage for a delay to decision making around the end of QE, not to mention the potential for pushing out the actual end date, something that’s more ridiculous the longer the economic recovery beds down.

Equally, don't expect Draghi to go too far on talking down the euro. As Gadfly has argued, if the euro were to drop too fast that would just bring the hawks out of hibernation and raise pressure for a faster exit. Until recently, some ECB members had been pushing hard to break the link between the inflation outlook and forward guidance on bond purchases. That is not a debate that Draghi wants to resurface any sooner than it has to.

If journalists ask him whether policy makers have started debating on how soon a rate rise can follow the end of QE, he will be unlikely to offer too much insight beyond his mantra of "confidence, persistence and patience."

Draghi has already set the stage for removing the fire under the euro with comments on Friday at the International Monetary Fund meeting in Washington. He said while recent data suggest growth “may have peaked,” momentum “is expected to continue.” That’s a signal for the euro to avoid running up too far, but also not to lose faith and sink too low.

It’s quite the balancing act. But barring any dollar volatility – something that can never be ruled out – the common currency should be happy to bump along its current levels for a while yet. 

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

    To contact the author of this story:
    Marcus Ashworth in London at mashworth4@bloomberg.net

    To contact the editor responsible for this story:
    Jennifer Ryan at jryan13@bloomberg.net

    Before it's here, it's on the Bloomberg Terminal.
    LEARN MORE