Euro Exposed in Short Term as Draghi Seen Signaling Discomfort

  • ECB may refer to tightening financial conditions: Swedbank
  • Policy makers may not outline tapering intent next week

Krpata Says Sky Is the Limit for the Euro

The euro is vulnerable to a correction from levels not seen since 2015 as the European Central Bank may express concern about the currency’s breakneck appreciation so far this year, according to Swedbank AB.

The common currency has surged about 14 percent this year, defying most analysts’ predictions for it to tread water. Central bank officials expressed concern that the exchange rate might overshoot at some point, minutes of the ECB’s last policy meeting in July showed. The ECB, led by President Mario Draghi, is due to review its monetary policy next week.

Bund yields have nearly doubled this year, partly on speculation that policy makers may outline their intent to taper monthly asset purchases worth 60 billion euros ($72 billion) that is scheduled to run through the remainder of 2017. The euro’s strength is likely to weigh on euro-area inflation, which is already short of the ECB’s goal of just under 2 percent.

“While Draghi isn’t panicking over the strength of the euro at this juncture, the Governing Council likely want to make a statement that they dislike the way it leads to tighter financial conditions,” Anders Eklof, the chief currency strategist at Swedbank, said in an interview. “I don’t expect that the ECB will come up with a big plan in September.”

The euro fell for a second day on Wednesday after touching 1.2070, the strongest level since January 2015, on Tuesday. The common currency’s surge this year has caught many analysts by surprise: the median year-end forecast for the currency as of Jan. 1 was 1.07, well short of current levels.

A more concrete discussion and plan around further tapering is likely in October, Stockholm-based Eklof said.

Swedbank, Sweden’s second largest bank by market capitalization, forecasts the euro will end the year at $1.17 as several factors weighing on the dollar -- such as the recent softness in U.S. inflation, lingering concerns about how the debt-ceiling imbroglio will be resolved and skepticism surrounding President Donald Trump’s ability to push through tax legislation -- could eventually ease.

“The market is not at all discounting the prospect of a tax reform in the U.S., which could lead to a one-off flow from the euro and into the dollar as corporates repatriate profits,” said Eklof.

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