Euro’s Road to $1.25 Is Cleared 

Euro bulls have one less potential headwind to worry about: strong verbal intervention by the European Central Bank.

Responding to questions about the currency’s strength on Thursday, President Christine Lagarde said the Governing Council monitors the euro “very carefully,” evoking language that’s in line with the ECB’s previous communiques and emboldening traders who had been bracing for her to hit back harder at its recent appreciation.

The common currency is heading for its best year since 2017, fueling speculation that policy makers would lean against an advance that threatens to depress prices further. But given the ECB has no plans to lower interest rates in the immediate future, and with the risk of a verbal rebuttal averted for now, the road for further gains to appears to have been cleared.

Euro’s Road to $1.25 Is Cleared 

The euro rose 0.5% during the press conference that followed the ECB’s last policy meeting of the year, and subsequently pushed as high as $1.2159, beyond levels that have provoked a response from the central bank in the past. While the currency slipped on Friday, long-term charts now suggest a move toward the $1.26 handle is in the cards.

“The governing council did not upgrade their rhetoric against the recent strength of the euro and instead stuck to their boilerplate language,” said Ned Rumpeltin, European head of foreign-exchange strategy at Toronto-Dominion Bank.“We may need to see a rapid run up to test the 2018 highs above $1.25 before the market wakes up to the risk of a sharper rebuke from the ECB.”

Echoing Lagarde’s position, Bank of France Governor Francois Villeroy de Galhau said Friday the policy maker is “very vigilant” regarding the euro’s impact on inflation, but doesn’t have an exchange rate objective.

This all coincides with a breakthrough in negotiations over the European Union’s landmark $2.2 trillion stimulus plan. The package promises deeper integration between member states, something that has long been cited as a catalyst for further strength in the common currency.

‘Pain Threshold’

Still, investors may opt to take profit on part of their long exposure in year-end adjustments. Short-term charts show a correction may be due as the dollar looks ripe for a rebound. Brexit talks may also weigh on the common currency in the following days with the UK and EU still locked in an impasse.

The currency was 0.2% weaker at $1.2117 as of 11:19 a.m., in London, tracing a move lower in the pound after European Commission President Ursula von der Leyen said that a no-deal outcome is now the most likely.

Meanwhile, risk reversals in the common currency -- a barometer of market positioning and sentiment -- show that options traders are least bullish in its prospects over the next month since mid-November.

The euro has advanced about 8% against the dollar this year. Last week, it touched $1.2178, the strongest level since 2018.

“The euro has to really exceed a pain threshold of sorts for the ECB to cut again,” said Valentin Marinov, head of group-of-10 foreign exchange strategy at Credit Agricole SA. “For us that pain threshold will come at $1.25.”

©2020 Bloomberg L.P.

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