Euro Climbs as ECB Leaves FX Watchers Split on Currency Outlook

(Bloomberg) -- The euro jumped to a seven-week high as Mario Draghi disappointed some observers who had expected the European Central Bank might signal even more openness to easing measures.

Foreign-exchange analysts are divided as to whether the common currency will add to gains or settle back into the narrow range it’s plied all year. Draghi’s own comments on the outlook offered succor for both optimists and pessimists. He indicated that the ECB won’t shy away from supporting the economy as growth weakens, but also noted that economic data in the region aren’t bad. Changes to the central bank’s forecasts were mixed, with the ECB boosting its inflation and growth predictions for this year, but trimming them for 2020 and 2021.

The euro’s strength is testament to “the dovish expectations in the market ahead of the meeting and the grave disappointment with the lack of willingness to commit to near-term easing,” said Jens Naervig Pedersen, a senior analyst at Danske Bank A/S. The markets could be left with a Federal Reserve that’s ready to cut rates and an ECB that’s on the sidelines, “which could add to recent positive momentum” for the euro against the dollar, he said.

The European currency surged as much as 0.8% to touch $1.1309, but failed to break above its April high of $1.1324. Gains came as the central bank extended its forward guidance to keep interest rates steady through the first half of 2020 and set terms on long-term loans.

The euro then slipped back below $1.13 after Draghi noted there is “considerable headroom” for more quantitative easing and said that “several members” of the ECB’s policy-making body raised the possibility of interest-rate cuts. The common currency was higher on the day against almost all of its Group-of-10 peers and was at $1.1286, up 0.6%, as of 12:13 p.m. in New York.

Some analysts doubt the common currency has room to rise further.

“This is a little position-reduction move higher in euro, but does nothing to materially alter its range-bound price action,” said Jordan Rochester, a currency strategist at Nomura International Plc. If anything, the failure of the euro to hold above $1.13 “will encourage folks to try and fade it lower here.”

Eimear Daly, a London-based currency strategist at Macquarie Bank, is also skeptical about the prospects for an advance in the euro, which she said has been “frustratingly range-bound.” She’s keeping a keen eye on the $1.12 and $1.13 levels and noted that “in spite of the euro’s initial reaction, this press conference is dovish and will certainly increase market pricing for future rate cuts.”

Canadian Imperial Bank of Commerce, meanwhile, does see a case for a stronger euro against the dollar -- just not yet.

“There will be a time for EUR/USD to move higher, but we need more than just an extension of cheap funding to domestic banks,” CIBC strategist Bipan Rai wrote in a note to clients. “What’s needed is actual outperformance in European data relative to the U.S. If spot can manage to break above 1.1330/50, then we’ll talk.”

To contact the reporters on this story: Katherine Greifeld in New York at kgreifeld@bloomberg.net;Anooja Debnath in London at adebnath@bloomberg.net

To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Mark Tannenbaum

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