The Euro is Still a Buy on Dips

Market jitters regarding what the head of the European Central Bank will say at next weeks Economic Symposium to be held at Jackson Hole is seen weighing on the Euro - but any weakness is likely to be brief we are told.

This suggests the outlook for the EUR/GBP and EUR/USD ultimately remains positive, despite any short-term setbacks that we might see.

The Euro dipped against both the Pound and Dollar after an European Central Bank spokesperson said that ECB President Draghi would not announce any new policy message at the Jackson Hole symposium next week.

“An important driver of Euro strength since the spring has been the growing expectation of imminent ECB policy normalisation. The market is expecting some sort of (reverse) repeat performance from Draghi, who at the 2014 Jackson Hole conference stated that the ECB stood ready to use “all the available instruments” to lift inflation expectations,” says a brief on recent FX market action from Societe Generale.

Draghi’s statement then was widely read as a signal that the ECB was getting ready to launch QE.

But the latest Eurozone GDP data for the second-quarter, released Wednesday, August 16, highlights a broadening cyclical economic upturn in the region, “so the fundamentals support a stronger Euro into year-end,” say Societe Generale.

Societe Generale expect any further pullback in EUR/USD to be temporary and a buying opportunity.

“Across the channel, the UK government’s plan for an interim customs union deal with the EU post-Brexit has been met with incredulity by EU interlocutors. The lack of any substantive agreement in the Brexit negotiations should keep up the upside pressure on EUR/GBP,” say Societe Generale

We take issue with this assessment of recent Brexit developments noting that the official response from the European Commission was one that welcomed the UK’s latest moves.

Of course there is work to do but the big risk is that the ‘Brexit bias’ shown by markets is popped as negotiations continue.

This would allow the British Pound to enjoy a more sustained recovery.

Other strategists are also looking for Euro weakness to be temporary as the ECB is merely trying to halt the Euro's advance.

Morgan Stanley’s view is that this messaging from the ECB was to reduce volatility and expectations in the market.

“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's London base.

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. Either way, it appears like the ECB is just trying to buy time on the inevitable.

“The headline doesn’t rule out Draghi being asked about currency strength and talking about it in the context of inflation expectations as that would technically not be a policy message. We would still use any EUR dip to buy,” says Redeker.

Looking at the market, the Euro to Pound Sterling exchange rate is at 0.9132.

The Euro to US Dollar exchange rate is at 1.1773.

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