Euro (EUR) Exchange Rate Outlook Improves as Draghi Hints He's Out of Ammo

Published: Friday, 9 September 2016 07:30 BST - Written by James Fuller

STORY LINK Euro (EUR) Exchange Rate Outlook Improves as Draghi Hints He's Out of Ammo

Euro Gains on Pound, US Dollar after ECB Interest Rate Decision

Euro (EUR) exchange rates were boosted on Thursday as investors responded to the latest news from the Eurozone. Both the EUR/GBP and EUR/USD exchange rates advanced in the wake of the ECB's interest rate decision.

As anticipated, yesterday’s announcement from the European Central Bank (ECB) yielded no change to its current monetary policy, with all three of its headline interest rates remaining at their current rock-bottom levels and the euroland’s Quantitative Easing programme staying pegged at €80 bn per calendar month. However, the general tone of ECB President Mario Draghi’s rhetoric in the press conference which followed had a pronounced effect on several leading global currencies beyond the euro (currency : EUR).

QE Not Extended, EUR/GBP and EUR/USD Exchange Rates Bolstered

While the Euro Pound (EUR GBP) exchange rate advanced to 0.8495 after the ECB announcement, the EUR USD exchange rate hit a high of 1.1327.

While the Italian moneyman reinforced his belief that his region’s, ‘interest rates have to stay low for the economic recovery to proceed, and to firm up,’ he went on to note that, ‘in the end, will have a positive impact on bank balance sheets too.’

However, Euro (EUR) exchange rates were propped up by Draghi’s revelation that his policy board did not even discuss extending its controversial Quantitative Easing programme which is due to expire in March 2017. This much helped the euro, as did Draghi’s revelation that his Bank has upwardly revised its Gross Domestic Product growth forecast for this year from 1.6% to 1.7%. This surprise move appeared to go against the ECB President’s opening comments in his press conference which made the observation that –

‘the economic recovery in the euro area is expected to be dampened by still subdued foreign demand, partly related to the uncertainties following the UK referendum outcome, the necessary balance sheet adjustments in a number of sectors and a sluggish pace of implementation of structural reforms. The risks to the euro area growth outlook remain tilted to the downside and relate mainly to the external environment.’

Is the Euro (EUR) Forecast to Hold Gains against the Pound (GBP) and US Dollar (USD)?

But is the ECB decision enough to keep Euro (EUR) exchange rates buoyed or will the EUR/GBP and EUR/USD exchange rates reverse gains?

However, perhaps the most significant aspect of Draghi’s press conference saw him respond to a question whether central bankers in general are putting increased pressure on politicians to boost growth. Draghi reply to the question by quoting the statement issued by global leaders at least week’s G20 conference in China. In an echo of Franklin D. Roosevelt’s ‘New Deal’ policy which triggered the world economy’s emergence from the deep depression of the early 1930s, the assembled policymakers called for government action to increase activity levels. The relevant G20 passage read as follows –

‘Our growth must be shored up by well-designed and coordinated policies. We are determined to use all policy tools - monetary, fiscal and structural - individually and collectively to achieve our goal of strong, sustainable, balanced and inclusive growth. Monetary policy will continue to support economic activity and ensure price stability, consistent with central banks’ mandates, but monetary policy alone cannot lead to balanced growth. Underscoring the essential role of structural reforms, we emphasize that our fiscal strategies are equally important to supporting our common growth objectives. We are using fiscal policy flexibly and making tax policy and public expenditure more growth-friendly, including by prioritizing high-quality investment, while enhancing resilience and ensuring debt as a share of GDP is on a sustainable path. Furthermore, we will continue to explore policy options, tailored to country circumstances, that the G20 countries may undertake as necessary to support growth and respond to potential risks including balance sheet vulnerability. We reiterate that excess volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability. Our relevant authorities will consult closely on exchange markets. We reaffirm our previous exchange rate commitments, including that we will refrain from competitive devaluations and we will not target our exchange rates for competitive purposes. We will carefully calibrate and clearly communicate our macroeconomic and structural policy actions to reduce policy uncertainty, minimize negative spillovers and promote transparency.’

The implication that the world’s central banks may have no further scope to loosen monetary policy is forecast to help those economies with loose monetary policies including the Eurozone, potentially shoring up Euro (EUR) exchange rates in the medium term.

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