Euro wobbles as ECB hints at intervention to curb its strength
Last week, following the euro’s stellar gains in January, I asked the question, how high will the euro rise? Well, this week it seems we have an answer, as the euro not only stabilises but actually falls against the pound and US dollar.
The common currency lost almost two cents against the pound last week, falling from 0.8691 on February 1st to 0.8541 today. Meanwhile, against the greenback it lost two and a half cents, tumbling from a multi-year high of 1.3662 to 1.3410 at the time of writing.
Of course, these losses hardly undo the euro’s January gains. The common currency still sits close to historical highs against sterling and the buck. But what we’ve seen this week is that it’s rally isn’t endless.
ECB to “monitor” the euro’s strength
To account for the euro’s losses this week, we can look to what’s typically been the chief mover of the euro exchange rate in the debt crisis, the European Central Bank.
Speaking at the ECB’s monthly interest rate decision in Frankfurt yesterday, ECB president Mario Draghi expressed a surprising amount of concern about the euro’s current strength, to the extent that some investors now feel the central bank may intervene to curb its gains.
Draghi said the ECB will “monitor” the euro exchange rate (implying concern on his part) while adding “The exchange rate is not a policy target, but it is important for growth and price stability.”
This tells us that, if the euro is too strong, it could destabilises prices in the Eurozone, thereby prompting ECB action.
Therefore, the ECB appears quite open to intervening to weaken the euro. This surprised investors, because the European Central Bank has traditionally been seen as under the heel of Germany, a country fervently opposed to all forms of currency intervention, on the grounds they contribute to instability.
However, it seems that with Italian Mario Draghi at the helm of the central bank, it’s now more willing to exercise its right to “full independence”.
Intervention not today, nor tomorrow, but sometime
Crucially however, I think it’s important to note that Draghi’s comments don’t mean the ECB is going to spring into action tomorrow, dampening the euro with the equivalent of a monetary hosepipe.
Draghi also noted that the euro is currently within historically normal ranges. Indeed, it’s no stronger today against the US dollar than it was in 2007, before the financial crash. That means the euro’s current level isn’t a concern for the ECB.
Instead, it’s only if the common currency continues to strengthen that it’ll become a problem. To that end, the ECB president noted that he’ll see “whether appreciation is sustained and will alter our risk assessment.”
In short then, if the euro does keep climbing, to levels we might consider alarming, there’s a good chance the European Central Bank will intervene to slap it back down. This is therefore something certainly worth keeping an eye on.
Do you think the euro will keep rising? And should the ECB intervene to curb its strength? Let us know your thought in the comments.
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Pure FXPeter Lavelle is an economist at foreign exchange broker Pure FX. For a free no-obligation quote regarding changing currencies, get in touch at foreign exchange specialist Pure FX.
Copyright: Peter Lavelle, Pure FX
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