EUR/USD Downside to Continue on Single Currency Worries

2017-08-18 09:51:00

Nick Cawley, Senior Strategist

Talking Points

- A lack of inflation continues to handcuff the ECB as it looks to begin easing its bond buying program.

- ECB commentary on the risks of the EUR ‘overshooting’ may be seen as mild verbal intervention.

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The latest ECB minutes have emboldened EUR/USD bears after the central bank admitted that inflation is still unlikely to hit target for years to come, while a strong EUR makes exiting the current quantitative easing program a trickier prospect.

Thursday’s release of the recent ECB minutes threw up a couple of headlines that weakened the single currency with the central bank admitting that the currency’s current strength is hampering the rate-setters’ efforts to boost inflation in the Euro-Zone. The minutes showed that ECB members are worried about the ‘risk of the Euro overshooting’, a phrase that could be construed as a warning to the market that current EUR levels will not be tolerated. A strong single currency makes the bloc’s exports more expensive, while imports become ever cheaper, and acts as an anchor on already low levels of inflation.

The central bank report added that more policy space is needed ‘in either direction’ hinting that rates may remain lower for longer even when it starts to reduce the quantitative easing program. Expectations had been rising over the recent week that Mario Draghi would soon indicate a timetable of when the central bank would start to reduce quantitative easing, with his speech at next week’s Jackson Hole symposium the mooted date. However this has now been downplayed with the ECB President not expected to talk about monetary policy.

All this leaves the single currency looking vulnerable at its recent lofty levels against the US Dollar, especially if the Fed highlights its own quantitative tightening timetable at the next FOMC meeting. The September 19-20 meeting will also include the latest summary of economic projections and a press conference by Fed Chair Janet Yellen. The pair has just broken below the 20-day ema and could now target the July 26 low at 1.16060 and the 50-day ema, currently at 1.15970.

Chart: EURUSD Daily Timeframe (June - August 18, 2017)