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ECB Worries About Strength of Euro, EUR/USD Drops to Three-Week Low

ECB Worries About Strength of Euro, EUR/USD Drops to Three-Week Low

Martin Essex, MSTA, Analyst

Talking Points

- The account of the July 20 monetary policy meeting of the European Central Bank’s Governing Council show that the ECB is worried about the Euro overshooting

- In response, EUR/USD fell back to its lowest level for three weeks.

Check out our Trading Guide for the Euro: it’s free and has been updated for the third quarter of 2017

The minutes of the July 20 monetary policy meeting of the European Central Bank’s Governing Council show that the ECB is concerned about the currency overshooting after this year’s climb that has taken EUR/USD from a 1.0342 low on January 3 to a high of 1.1918 at the start of this month.

In response, the pair dropped to its lowest level for three weeks before quickly rallying, European stock prices jumped and core Euro-Zone government bond yields edged lower.

Chart: EUR/USD Five-Minute Timeframe (August 17, 2017)

ECB Worries About Strength of Euro, EUR/USD Drops to Three-Week Low

Chart by IG

Concerns were expressed about a possible overshooting in the repricing by financial markets, notably the foreign exchange markets, in the future, the ECB said in the accounts.It was underlined that the still favorable financing conditions could not be taken for granted.”

The ECB has said already that talks on cutting back, or ‘tapering’, its €60 billion per month asset-purchase program won’t take place until the council’s next meetings on September 7 and/or October 26. This was the message given by ECB President Mario Draghi after the July meeting, although some analysts continue to expect the ECB’s monetary stimulus measures to be reduced relatively soon.

The problem for the ECB is that inflation, confirmed today at 1.3% year/year in July, remains well below the central bank’s target of below but close to 2% over the medium term and a tapering of monetary stimulus might be expected to keep it below target. Moreover, the recent strength of the Euro has already tightened policy, suggesting that interest rates could remain lower for longer than market pricing currently suggests.

Draghi, who has blamed the inflation undershoot on external factors, had been expected to give his thoughts on policy at the Kansas City Fed’s three-day economic policy symposium at Jackson Hole, Wyoming, that begins next Thursday but reports yesterday said he would not in fact give any steers on policy there.

--- Written by Martin Essex, Analyst and Editor

To contact Martin, email him at martin.essex@ig.com

Follow Martin on Twitter @MartinSEssex

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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