Euro reverses gains after optimistic Draghi sends currency to 3 year high

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26 January 2018


The Euro suffered from a very turbulent day of currency trading on Thursday.

he currency rocketed to a fresh three year high above the 1.25 level against the US Dollar in early afternoon trading following the first European Central Bank meeting of 2018. It then retraced all of its near one percent gains versus the US Dollar after Donald Trump reversed recent claims by suggesting that he wanted a ‘strong Dollar’.

President of the ECB Mario Draghi delivered an upbeat assessment of the Eurozone economy yesterday. He voiced optimism over the recovery, claiming that the Euro-area economy had expanded at a faster-than-expected and ‘robust’ pace. While inflation was yet to show convincing signs of an uptrend according to the Governing Council, there was also growing confidence that it would return to target. This stoked further speculation that the ECB could bring its quantitative easing programme to an end in 2018.

Investors largely overlooked Draghi’s attempts to quell the latest rally in the Euro. Draghi explicitly mentioned the strength of the currency during his opening remarks of the press conference, reviving a warning on exchange rate volatility not used since September. He stated that ‘recent volatility in the exchange rate represents a source of uncertainty which requires monitoring’. A warning that rates would not be raised in 2018 also failed to halt the Euro in its tracks and it took comments from Trump late yesterday evening that the greenback would get ‘stronger and stronger’ to knock it off its more than three year perch.

Yesterday’s assessment from the ECB does little to change our opinion that the bank will likely end its quantitative easing programme at the current end date in September, although hold off from hiking rates until mid-2019.

Sterling eases from post-Brexit high, investors eye US GDP data

Sterling had an equally up and down day on Thursday. The UK currency continued on its recent upward trend yesterday morning, hitting a fresh post-Brexit high, before losing ground again off the back of Trump’s comments. With no major announcements or economic data releases in the UK, the Pound was driven largely by events elsewhere.

Activity should pick up pace today, with this morning’s GDP data expected to show that the UK economy grew by 0.4% in the final quarter of last year, matching its pace from Q3. Arguably more important to the currency markets will be this afternoon’s GDP data out of the US at 13:30 UK time, given its potential implications for Federal Reserve policy.