Photographer: Simon Dawson/Bloomberg
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The Euro Keeps Hitting a $1.25 Ceiling This Year

Euro bulls are struggling to push the currency above $1.25 this year, just as the $1.20 level proved a blocking point in 2017.

The currency has bounced off that ceiling three times in the past month, in a striking similarity to its behavior in the September-October period. It took a combination of optimism over monetary policy and German politics to finally break clear of $1.20 in January. It will take the results of Italian elections and the European Central Bank’s meeting in March to see if it can do the same again with $1.25.

The trading week starting March 5 will see the market’s reaction to an Italian election long seen as one of the few remaining risks for the euro zone, as well as a weekend vote by Germany’s Social Democrats on approving a coalition government with Chancellor Angela Merkel, and the ECB meeting on March 8.

The euro finally escaped from the gravity of $1.20 on Jan. 12 after Merkel and the Social Democrats reached a preliminary accord, alleviating some risks for the common currency. This followed minutes of the ECB’s December meeting that showed policy makers were considering a hawkish shift in their communication in the early months of 2018.

If a hung Italian parliament is avoided in the March 4 vote, or parties not flirting with leaving the euro zone have control, the election could join those last year in the Netherlands and France in being seen by the market as too much fuss about nothing.

And then will come Mario Draghi. The market acknowledges the chance that the ECB president will raise inflation and growth projections, and is also watching for a change in the Governing Council’s language as policy makers prepare for the eventual end of bond purchases.

Should these risks turn in favor of the euro, the currency could stage a decisive rally above $1.25. Otherwise, it could repeat its sideways trading pattern seen in the later months of 2017.

  • NOTE: Vassilis Karamanis is an FX and rates strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice
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