ECB Expresses Concern With the Euro Exchange Rate's Meteoric Rise

The Euro's strong run against the Pound and US Dollar appears to have suffered a setback after the European Central Bank expresses concern over currency's fast appreciation in value.

The account of the ECB’s July monetary policy meeting published on August 17 reveals “concerns were expressed about the risk of the exchange rate overshooting in the future.”

The contents of the minutes appear to be at odds with the messaging deliverd by ECB President Draghi in the wake of the very same meeting where he told reporters, "it's true there have been movements in bond price, asset price, exchange rates and so on, but financing conditions remain supportive."

Markets took this as a sign nonchalant about the currency's rise.

The release of the ECB minutes are the culmination of a tough day’s trade for the Euro which saw initial weakness sparked by media reports released on Wednesday that Mario Draghi would not announce a plan to withdraw monetary stimulus at an appearance in Jackson Hole, Wyoming in late August to prepare the market for the ECB’s plans.

The Pound to Euro exchange rate is now at 1.0988, the Euro to Dollar exchange rate has now fallen back to 1.1729.

The market has not been used to weakness in the dominant Euro, but "with the ECB becoming worried about a high exchange rate, one has to wonder whether they will now put their QE tapering plans on hold until central banks of the Eurozone’s largest trading partners start tightening their policies," opines Fawad Razaqzada at Forex.com in response to the market’s reaction to the minutes.

Markets have been buying Euros over recent months in anticipation of the ECB withdrawing stimulus to the Eurozone economy - an announcement is expected in coming months. The process is loosely referred to as tapering.

Viraj Patel at ING Bank N.V. says the ECB's concerns on the Euro are fully justified and while the strength cannot be halted in its entirety, it can manage the speed of ascent.

"While there is no doubt that tapering is coming, as long as the journey reflects cautious and careful baby steps towards the end game, the ECB may indeed materially decrease the risk of EUR overshooting," says Patel.

The contents of the minutes to the meeting are interesting when you recall that during his press conference following the July meeting Draghi appeared to be relaxed when asked about the Euro's gains. We reported that the ECB President had effectively green-lighted Euro strength.

Whatever the case, the ECB is merely buying time and the Euro will ultimately recover and move higher at some point.

The economy is picking up pace with employment falling and wages rising. It will surely be a matter of time before inflation starts climbing in a decisive manner towards the 2% mark.

Verbal intervention can only do so much.

Morgan Stanley’s view is that ECB messaging is aiming to reduce volatility and expectations in the market but the Euro is ultimately a buy on weakness.

“The ECB is still working through its economic forecasts for the next update on September 7 and in our view is going to hold off from announcing tapering until the October meeting,” says Hans W Redeker, head of FX research at Morgan Stanley in London.

Even the suggestion that the tapering announcement is only due in October might disappoint Euro bulls with many eyeing the September meeting for such a call.

“We would still use any EUR dip to buy,” says Redeker.

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