The Euro is “becoming increasingly relevant in our assessment of price stability”, this is last night’s statement from European Central Bank (ECB) chief Mario Draghi.
There is a simple translation of this for those of us that don’t fluently speak the language of Central Bankers. The ECB is finally growing concerned as EUR/USD approaches the $1.40 level.
The ECB has every reason to grow concerned. It has long lauded an anticipated pick up in exports from the Euro area as a stimulus to revive flagging economic activity. As the Eurozone remains perilously close to a deflationary spiral every available stimulus will be required, however with historically loose monetary policy the available stimuli are few and far between.
Naturally the ongoing global recovery will increase demand for exports from all countries. The Eurozone must make sure that it benefits from its fair share of this pickup in global trade. This simply will not happen if Eurozone goods and services become internationally uncompetitive.
It is not surprising then that the ECB is set to dust off it’s exchange rate policy weaponry. What is surprising however is that it has taken it this long to do so. The Euro has been steadily rising since the middle of 2012 and over the past 12 months has repeatedly set multi year highs.
Notwithstanding the lack of action to date, it appears that the ECB has finally taken notice of the situation. The ECB was criticized yesterday for not giving prominence to the rising Euro in it’s Monthly Bulletin. This is what prompted Draghi to directly address it last night, but to limited avail.
Given the sensitive nature of the foreign exchange markets a Central Bank has two levels of attack when it intends to weaken it’s currency. It can firstly attempt to ‘talk’ the currency lower by simply stating a level beyond which it will not allow the currency appreciate. Failing this it can move to direct intervention, however the rhetoric approach is often all that is needed.
The ECB may not have the luxury of relying solely on rhetoric. Since Draghi’s statement last night the Euro has moved convincingly higher, taking out the key $1.39 resistance level, setting another fresh multi year high and positioning itself for an imminent advance on $1.40.
To contact the reporter of this story: James Brennan at firstname.lastname@example.org