Euro currency bounces day after ECB holds off on rate hikes

June 15, 2018

Frankfurt (June 15)  The euro bounced on Friday after suffering its worst day in nearly two years when the European Central Bank signalled it would keep interest rates at record lows into the summer of 2019.

By that time the U.S. Federal Reserve is expected to have raised rates at least five times, making the dollar much more attractive than the single currency.

The euro slumped nearly 1.9 percent on Thursday as markets dialled back expectations of a long-term euro rally despite the ECB signalling the end of its crisis-era stimulus of massive bond purchases.

Its losses were so big partly because investors had expected the Fed to strike a more cautious stance than it did when it raised rates on Wednesday.

On Friday, however, the outlook for the euro appeared somewhat brighter as banks adjusted their forecasts for interest rates to the ECB’s guidance, removing some uncertainty from the market.

At GMT 1100 the euro was up 0.3 percent at $1.1593 though still close to a ten-month low of $1.1510 hit on May 29.

“Its quite natural to see some consolidation after such a dramatic slide,” said Manuel Oliveri, an FX strategist at Credit Agricole in London.

“We expect the euro to start bottoming out again. Policy differentials should stabilise, positioning is more balanced, we’re sticking to our year-end outlook $1.25-$1.26,” he said.

Other analysts said they thought that now the ECB’s closely-watched meeting was out of the way currency markets could embrace more risk.

“All this removes some uncertainty from markets and supports risk-taking over the second half of June,” said Societe Generale analyst Guy Stear.

The dollar’s index against a basket of six major peers rose on Friday to as high as 95.131, its strongest since Nov. 7, and the greenback was up roughly 1 percent versus its Japanese peer on the week.

The currency pair, sensitive to shifts in risk appetite in the broader markets, could be impacted by developments later on Friday in the U.S.-China trade spat.

U.S. President Donald Trump is due to unveil revisions to his initial tariff list targeting $50 billion of Chinese goods, and focus was on whether the revisions would ease or further fuel trade tensions.

As trade tensions resurfaced, the dollar hit a one-year high of $1.3160 versus the Canadian dollar.

Societe Generale macro strategist Kit Juckes said he foresaw further pain for the euro in the near-term.

“Europe needs stronger data to change the rate debate and a calmer Italian political backdrop to provide confidence that normalisation leads to a stronger currency,” said Societe Generale macro strategist Kit Juckes.

“$1.15 is crucial. It’s also our forecast for where we will be in September, with a gradual rehabilitation thereafter,” he said.


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