The euro ended the week on a steadier note after signs that the European Central Bank is uneasy about the risk of an overshoot in the single currency triggered a bout of selling.
The single currency has appreciated sharply this year against a host of currencies, including the US dollar, sterling and the yen. Since the middle of May, the euro has risen almost 5 per cent against a basket of peers and earlier this month climbed as high as $1.1913, a two-and-a-half year high.
However, some of that appreciation reversed on Thursday after minutes of the ECB’s July meeting showed policymakers’ concern that pulling back from stimulus measures could further fuel an uncomfortable rally in the currency.
“Concerns were expressed about a possible overshooting in the repricing by markets, notably the foreign exchange markets, in the future,” noted the minutes.
Although the euro recovered on Friday trade 0.2 per cent higher at $1.1743, up from its $1.1660 low struck on Thursday. But for the week, the euro was off 0.6 per cent.
The strength of the euro has begun to show up in recent data, with Germany’s exports in June dropping sharply, while the share prices of eurozone companies that rely on foreign earnings have also underperformed in recent months. For the ECB, a strengthening euro complicates its policy efforts of achieving an inflation goal of around 2 per cent.
The currency market remains focused on the implications of the ECB’s policy outlook, particularly as the central bank’s president Mario Draghi will speak next week at the annual symposium for central bankers in Jackson Hole, Wyoming.
Some analysts believe Mr Draghi could seek to temper any euro strength in his Jackson Hole speech.
‘’Such sentiments could be repeated by ECB President Draghi in upcoming speeches, including at the high profile Jackson Hole symposium,’ said Daragh Maher, currency strategist at HSBC. ‘’Positive news is generating less of an impact and the latest batch of ECB minutes show a growing disquiet with euro strength.’’
Mr Maher said the euro is looking “vulnerable” and, as a result, is exiting a long position against sterling. The euro has advanced almost 7 per cent against the pound this year.
Others are sceptical that Mr Draghi will discuss the policy outlook ahead of the central bank’s policy meeting on September 7.
‘’While it seems unlikely that Draghi will use his speech at Jackson Hole to address policy issues it is also clear that the most effective way the central bank can tackle unwanted euro strength will be to start downplaying the likelihood of any reduction in the asset purchase programme,’’ said Simon Derrick at BNY Mellon.