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Exchange Rate 'Volatility' Is 'Source of Uncertainty': Draghi

28 January, 2018, 00:18 | Author: Samuel Sharp
  • Exchange Rate 'Volatility' Is 'Source of Uncertainty': Draghi

European Central Bank (ECB) chief Mario Draghi warned on Thursday (25 January) that United States support for a weaker dollar was fuelling market instability.

A stronger euro makes it more hard for eurozone nations to sell their products and services overseas.

Persistent US Dollar weakness is also likely to benefit Euro exchange rates, with concerns over the trade policies of the Trump administration looking set to persist for some time to come.

US growth is expected to have slowed slightly from 3.2% to 3% quarter-on-quarter, but if the projection comes in lower than expected investors may continue to sell the US Dollar.

Draghi said Thursday that recently volatility in the euro's exchange rate was "a source of uncertainty" that merited "monitoring".

Inflation is also years away from rising back to the ECB's target of 2 percent, so Draghi can hardly afford any big currency swings.

This was not enough dovishness for the traders and they began to push the euro higher as it rocketed through the 1.25 region and it seemed that it would only be a matter of time before it went towards 1.26.

NAB Research discusses EUR/USD outlook ahead of tomorrow's European Central Bank meeting and notes that while the pair is is over 3.5% higher from since the last European Central Bank meeting Minutes were released, its recent rally reflects the broadly weakening USD.

In a press briefing after the ECB kept interest rates unchanged, Draghi said underlying inflation in the euro zone is expected to rise gradually over the medium term supported by the bank's monetary policy measures as well the economy's continued expansion.

Germany's Ifo index rose to 117.6 points in January from 117.2 in December, matching an all-time high from November.

The bank says it'll keep buying 30 billion euros ($36 billion) per month in bonds at least through September.

"The broader dollar decline story remains in place and, unless we see a substantial shift in expectations on future policy tightening in the U.S, the dollar will likely remain on the back foot", said Richard Falkenhall, a senior currency strategist at SEB in Stockholm.

Besides the European Central Bank news however, EUR/USD is likely to be driven by US news and the strength of the US Dollar.

The yield on 10-year German government bonds, the benchmark for the bloc, hit a six-month high at 0.579 percent following Draghi's remarks. "We look at inflation, that is our main concern".

The Fed has its first meeting of the year in the coming week, but with it being Janet Yellen's last meeting as chair no change is expected.

But predictions for tighter European Central Bank policy are adding to pressure on the currency and raising market bets for a rate hike as early as December, a move seen as premature even by the most hawkish of policymakers.

Draghi said strong eurozone data had "strengthened further our confidence that inflation will converge to our inflation aim of below or close to 2%".


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