Merkel Okay with the Euro Exchange Rate's Rally

• FX Quotes
• Pound to Euro exchange rate today: 1 GBP = 1.0850 EUR
• Euro to Pound Sterling exchange rate today: 1 EUR = 0.9217 GBP

Image (C) European Council.

German Chancellor Angela Merkel has told reporters at her annual summer press conference that the value of the single-currency and Germany’s trade surplus are both subjects that are outside of political hands.

The comments are seen as being an acceptance that the Euro's rally is here to stay, and will ease concerns amongst traders that the move higher might be fought by European policy-makers.

“We don’t have a political influence over the exchange rate, we’re happy about our competitiveness and we avoid unfair trade practices,” replied Merkel when questioned over what the Euro’s recent strength could mean for the German manufacturing industry.

Germany is the export engine of Europe and the rise in the value of the Euro makes the cost of German goods and services on the global market place more expensive. It therefore goes that traders who are pushing the Euro higher will be looking for signals that Europe's stronger leader is uncomfortable with the rise.

"I don’t view the trade surplus as so dramatic but if the trade surplus should now shrink, then that would be one of those developments that’s really out of our hands," added Merkel suggesting that any impact of the exchange rate on Germany's trading position is a matter for market forces.

This is seen by many in the foreign exchange community as an apparent greenlight for the Euro's to run higher still.

The comments echo those made in May 2017 when Merkel blamed a “too weak” Euro as being one reason for Germany’s trade surplus.

“The Euro is too weak - that’s because of ECB policy - and so German products are cheap in relative terms,” Merkel told an audience in May, “so they’re sold more.”

“The sheer size of Germany’s current account surplus and the straight line increase in the surplus throughout the period in which EUR/USD rallied from a record low of 0.8230 in 2000 to a high of 1.6038 in 2008 underlines the fact that Germany can withstand swings in FX,” says Derek Halpenny, head of global markets research at MUFG.

Merkel’s comments add to a discourse in which the Euro’s rally is accepted with the understanding that ultimately market forces cannot be restrained. This removes a major risk for traders who often see policy-maker’s as potential hazards.

"Apparent tolerance for current the level of the Euro makes it more attractive than other currencies," says Kathy Lien, Director of BK Asset Management in New York.

Merkel and France’s Emmanuel Macron meanwhile also both spoke about deeper integration at the core of the EU following the UK’s vote to leave.

Of note was Merkel endorsing the idea again of a European Monetary Fund with a combined European finance and economy minister, something that plays into longer-term stability of the Euro.

"The goal is to future-proof the currency union against future crises,” says Hans Redeker at Morgan Stanley.

Get up to 5% more foreign exchange by using a specialist provider by getting closer to the real market rate and avoid the gaping spreads charged by your bank for international payments. Learn more here.

ECB Reticent on Euro Strength

The Euro index - a measure of broader Euro performance - is seen at its highest level since 2015 at present having reached 95.50.

The move has largely been driven by a recovery in the Euro to Dollar exchange rate which trades above 1.20 for the first time in two years and the Euro to Pound Sterling exchange rate which is at eight-year highs at 0.9293.

The downside of a stronger Euro is that it would tend to dampen global demand for Eurozone exports and therefore would knock some percentages of economic growth. It also adds downside pressure on inflation - something the European Central Bank is desperate to see closer to 2%.

But to date, the European Central Bank has largely been reticent in addressing the Euro’s strength.

Merkel’s comments come after ECB chief Mario Draghi was interpreted to have given a similar blessing to the Euro's rise in an address at the Economic Symposium in Jackson Hole, Wyoming on August 25.

“He did not voice any concerns about the currently strong Euro levels. This was the key item that markets jumped upon, as they now do not expect Euro strength to hinder the ECB in policy normalisation, ignoring the warnings that it will be a slow process,” says David A. Meier, an economist at Swiss wealth manager Julius Baer.

Historically, the EUR/USD is less than halfway between its 2008 1.6038 high and last year's 1.0352 low.

The 5-year average value of EUR/USD is around 1.21 and "that may explain why the ECB is not overly concerned about the Euro's level," says Lien.

... But ECB Could Merely be Saving Ammunition

But there is a danger that the Euro-Dollar’s jump above 1.20 invites scrutiny and the ECB is saving ammunition for a move on the exchange rate.

Indeed, not everybody is convinced policy makers will remain so blasé if the European currency continues to rise over the coming days.

“Our judgement is that the Bank is more concerned about the pace of change in the currency than its level. So if the Euro continues to rise, particularly at its recent rapid pace, President Draghi seems pretty likely to use the press conference following next week’s policy meeting (7th Sep.) to talk it down,” says Jennifer McKeown, a chief European economist at Capital Economics in London.  

Furthermore Julius Baer’s Meier believes the rally in the Euro - ultimately stemming from the belief that the ECB will cut its quantitative easing programme in coming months - has run too far.

Meier believes, “that current Euro strength expresses exaggerated speculation on ECB monetary policy normalisation,” adding, “Euro euphoria should ebb off while higher rates support the Dollar, explaining our EUR/USD three-month forecast of 1.12.”

We would expect more caution to be exercised by currency markets in the lead up to the ECB’s September 7 meeting in Frankfurt.

This should allow the Pound to Euro exchange rate to ease back from heavily oversold conditions and potentially form a near-term base.

The ECB is expected to announce that a reduction in the asset purchase programme is due to take place, perhaps as early as December.

But, any failure to address the issue might disappoint traders and send the Euro sharply lower.

It could be that the ECB calculates that a delay would settle the Euro somewhat without the need of verbal intervention.

May Heads to Japan, Future Trading Relationship Eyed

With the U.K. and E.U. locked in divorce talks, U.K. Prime Minister Theresa May is in Tokyo with the intention of easing Brexit fears, both internationally and domestically, and pushing ahead on early free-trade talks with the world's third largest economy.

May is scheduled to sit down with Toyota's chairman during her three-day tour which starts in Osaka before moving to Tokyo where she will meet with Emperor Akihito and Prime Minister Shinzo Abe, who visited Britain this year.

Britain formally told the EU in March it will withdraw from the 28-member bloc, stirring fears in Japan about what the move would mean for companies with significant business interests in the country.

"We're going to ask for transparency and predictability so as to minimise the impact on (our) companies," a Japanese foreign ministry official in charge of European affairs said ahead of May's visit.

Corporate Japan has a major presence in the U.K. owing to its links with Europe, and Brexit might threaten that access, something Japan is nervous of.

The U.K. cannot afford to lose the faith of Japanese, and global investors, and this trip is seen as an attempt by May to soothe concerns.