Euro Bulls Failing to Heed Draghi May Test ECB `Pain Threshold'

Updated on
  • Common currency breaks through $1.20 despite Draghi rebuffs
  • Euro forecasts are subject to upside risks, says UniCredit

Euro bulls swatted aside concerns by European Central Bank Mario Draghi over the currency’s strength to take it to a 32-month high as they focused on a potential October announcement on the future of the central bank’s stimulus program. 

The common currency approached $1.2100 and traded at its highest since January 2015 even as Draghi repeatedly stated that the exchange rate was a source of uncertainty that requires monitoring. Instead, investors concluded that there is little Draghi can do to stop the currency’s path higher as the ECB prepares to scale back its asset-purchase program amid improving economic growth in the euro area.

“Draghi’s probably done enough to slow the appreciation in the euro but not the path of travel, which is up,” said Patrick O’Donnell, a senior investment manager at Aberdeen Standard Investments.

Going into this week’s policy review, economists had widely telegraphed their concerns about the common currency’s strength weighing on euro-area inflation. The euro has advanced about 14 percent against the dollar this year, enough for the ECB to lower its inflation forecast for 2018 to 1.2 percent from 1.3 percent. Still, the lack of explicit comments seeking a weaker exchange rate are likely to underpin the currency, analysts said.

“He’s taken a few shots across the market’s bow on the exchange rate, but has fallen well short of a full broadside,” said Ned Rumpeltin, the European head of currency strategy at the Toronto-Dominion Bank. “I very much agree with the notion that the market is going to keep pressing until it finds the true pain threshold.”

The euro climbed 0.3 percent to $1.2053 as of 8:51 a.m. in London, after closing 0.9 percent higher on Thursday. Earlier Friday, the currency touched $1.2092, the highest level since Jan. 2, 2015.

The risks for the euro are firmly higher, according to UniCredit SpA.

“It’s difficult to see how this rally can stop,” strategist Vasileios Gkionakis in emailed comments. “Our current forecasts -- which were on the bullish side a few months ago -- of $1.20 for this year and $1.25 for next are clearly subject to material upside risks.”

— With assistance by Katherine Greifeld, Lananh Nguyen, Dennis Pettit, and Charlotte Ryan

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