The euro’s rally may have only just begun. While the European Central Bank (ECB) made few changes on Thursday to its forward guidance and Mario Draghi said that policymakers were still waiting for wages and prices to match the region’s improving economic growth, the common currency rallied to its highest level in nearly two years.
It’s the best performer among Group-of-10 currencies this year and could still have further to run with the bank likely to announce the scaling back of its quantitative easing programme in either September or October.
“It’s an armour-plated rally and it won’t stop,” Peter Kinsella, a London-based senior foreign exchange and rates strategist at Commonwealth Bank of Australia, wrote in a note. “Everything speaks in favor of further EUR appreciation – increasing portfolio inflows, changing monetary policy, improved political risks.”
Increased hawkishness from the central bank, spurred by Draghi saying that reflationary forces had replaced deflationary ones on the continent, has helped the euro rally from lows last seen near the start of the millennium. Investors expect the ECB to start tapering in the New Year and are pricing in a 10 basis point rate hike by September 2018.
At the same time, political risks have largely dissipated. The victory of market-friendly Emmanuel Macron in France allayed fears after a populist wave swept through the European Union following the Brexit vote and the election of Donald Trump as president of the US Economic growth has also picked up, helping to buoy investor prospects.
The euro broke through $1.16 after Draghi said that the currency’s recent re-pricing had received “some attention,” without specifically saying he was concerned about its strength, at the press conference following July’s ECB decision. That reference helped boost the shared currency, while European bonds rallied following the meeting led by those of Spain and Portugal.
Mario Draghi “essentially did not push back on the market pricing, which was the key point,” said Jordan Rochester, foreign-exchange strategist at Nomura International in London. “The Fed was moving more aggressively in terms of their monetary policy while other banks were still easing. All that’s come into reverse now,” he added, referring to the Federal Reserve’s recent rate hikes.
The euro advanced 0.1% to $1.1642 in London on Friday, having touched $1.1677, its highest since August 2015. The currency has climbed about 11% this year, partly on speculation that a tapering of bond purchases is drawing closer.




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