Euro Catches Severe Case of ECB Apathy as Fed, Brexit Take Stage

  • Once praised by Soros, Draghi seen losing ability to move euro
  • Currency had smallest ECB-day move this week since QE started

How Brexit Risk Impacts Currency Markets

The world’s most-traded currency pair is stuck in such a rut that even monetary policy decisions don’t seem to matter any more.

The euro swung by less than one U.S. cent on Thursday, the smallest move on the day of a European Central Bank meeting since officials started quantitative easing in March last year. Over the past three months, it’s been about the least volatile since January 2015.

The lack of reaction to the ECB shows that with a key Federal Reserve meeting and the U.K.’s European Union referendum coming up this month, other cues are becoming more important for the shared currency. That’s a challenge for ECB President Mario Draghi, who needs a weaker euro to meet his goals of boosting growth and inflation.

“The ECB isn’t really a live issue,” said Ian Gunner, who manages a currency fund at family office Altana Wealth Ltd. in London. “They’ve done what they’ve done and nothing else is planned by them for the foreseeable future. The focus is now elsewhere, like on the Fed and also Brexit.”

The U.S. payrolls report, which showed U.S. employers added the fewest workers in almost six years in May, was a far bigger influence on the euro than the ECB meeting because it provided clues about the U.S. policy path. The euro jumped more than 1 percent as the chance of a Fed rate hike in June almost vanished after the data.

Soros’s Verdict

After plunging as much as 25 percent from May 2014 through the start of QE, the euro has since leveled off. Analysts surveyed by Bloomberg see the currency falling less than 2 percent by the end of the third quarter from its level of $1.1307 at 9:29 a.m. in New York on Friday.

The limited movement on ECB day was a far cry from the period before the ECB started its unprecedented bond-purchase plan. Draghi moved the euro by more than 3 U.S. cents on Jan. 22, 2015, sending it tumbling to an 11-year low, by saying QE would be bigger than markets had anticipated. “Pretty overwhelming” was billionaire investor George Soros’s verdict on the announcement.

If the ECB president is losing his ability to move the 19-nation currency, it’s an issue for his management of the economy. While Draghi reiterated Thursday that he doesn’t target the exchange rate, he said it’s important for price stability.

A stable and predictable currency is good for companies as it helps with planning, and bad news for traders who find it harder to make money in a market that isn’t moving. Pacific Investment Management Co. has reduced its foreign-exchange exposure on the expectation that currencies will trade in tight ranges.

Bigger Fish

“We knew that this meeting would be quite boring,” said Vincent Chaigneau, global head of rates and foreign-exchange strategy at Societe Generale SA in London. “There are much bigger events coming up in June.”

The main focus of currency traders in the next two months is the Fed’s policy announcement on June 15 and July 27. Higher U.S. rates would support the dollar at the expense of the euro. While the odds of an imminent hike as implied in futures prices tumbled on the jobs data, there’s still a better-than-evens chance of a boost to borrowing costs this year.

It’s the divergence between a Fed that’s tightening policy and an ECB that’s still expanding its balance sheet and has cut rates to record lows that sent the euro tumbling through the start of QE.

Brexit Fears

A possibly less-welcome driver is the U.K.’s referendum on EU membership on June 23, where the prospect of Britain leaving the world’s largest trading bloc is widely seen hurting the euro-dollar rate, as well as the pound. The single currency fell 2.8 percent last month, the most since November, as a series of polls suggested a Brexit appeared more likely.

Trading the euro against the dollar accounts for 24 percent of all currency deals, making it the most popular transaction in the world’s largest financial market, according to the Bank for International Settlements, the central bank for central banks.

Euro-dollar volatility during the past three months fell to a 17-month low of 8.4 percent earlier on Friday, before rising to 8.7 percent after the U.S. jobs report. A gauge of anticipated swings dropped to 8.5 percent, the lowest in 1 1/2 years, after Draghi kept interest rates, the bond-purchase program and the long-term inflation outlook for the euro zone unchanged on Thursday.

“The problem that Draghi has is that he doesn’t want to say anything that puts the euro up,” said Steven Bell, London-based global macro strategist at BMO Global Asset Management, which oversees about $230 billion. “He didn’t want to say that the economy is improving in Europe because he wants to keep the dangled carrot of further easing. He’s hoping the Fed tightens and the euro goes down, probably.”

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