Photographer: Chris Ratcliffe/Bloomberg

Euro Holds Near Seven-Month Low on Renewed Policy Divergence Bet

Updated on
  • Speculators increase bearish euro wagers to most since July
  • Fed, not ECB, will be principal driver of single currency: BNP

The euro held near a seven-month low amid speculation the European Central Bank will maintain its easy monetary policy as the Federal Reserve prepares to raise interest rates.

The single currency held onto three weeks of declines after ECB President Mario Draghi said Oct. 20 that neither tapering of the bank’s bond-buying plan nor an extension of the program were discussed at its two-day policy meeting. Speculators increased bearish-euro bets to the most since July as expectations faded that officials back a sudden end to quantitative easing after March.

“Draghi was dovish because he said that the tapering rumors were wrong and purchases won’t be stopped abruptly,” said Sam Lynton-Brown, a foreign-exchange strategist at BNP Paribas SA in London. “They’re likely to extend QE in December and they may do so at the current rate. That’s consistent with the euro weakening.”

The euro was little changed at $1.0874 as of 1:24 p.m. in New York, after touching the lowest since March 10 on Friday. The 19-nation currency has depreciated more than 3 percent in October, setting it up for its worst monthly performance since last November.

Net-short positions on the euro climbed to 109,268 contracts in the week ended Oct. 18, the biggest bearish position since July 26 and up from 93,472 the week before, according to the Washington-based Commodity Futures Trading Commission.

Economic Pick-Up

The euro failed to bounce back even after a Purchasing Managers’ Index for manufacturing and services showed the fastest pace of economic momentum this year.

Pressure is meanwhile building in the U.S. for a rate increase by year-end. San Francisco Fed President John Williams, who won’t vote on policy until 2018, said Friday that he’d support one rate increase in 2016 and a few more next year.

“Going forward, we’d say the principal driver of euro-dollar is much more likely to be the Fed than the ECB because there’s very limited ammunition that the ECB have left to weaken the euro,” BNP Paribas’s Lynton-Brown said.

The market-based probability of a December Fed hike was 71 percent, up from 66 percent a week earlier. The ECB next sets policy on Dec. 8.

The single currency is set to slide more than 2 percent toward $1.06 in the run-up to the gathering, according to Macquarie Bank Ltd.

“The euro should stay heavy into the December ECB meeting,” said Gareth Berry, a foreign-exchange and rates strategist at Macquarie in Singapore. “Draghi seems intent on extending the QE program beyond March at the current pace.”

— With assistance by Netty Idayu Ismail

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