Monthly Wrap: EUR – Euro benefits as ECB policymakers discuss timing of interest rate hike

Philip McHugh July 12th 2018 - 2 minute read

Key Takeaways: 

  • ECB interest rate hike speculation supports euro
  • Eurozone economy continues to demonstrate mixed signs of growth
  • EUR Monthly lows: £0.88, $1.18, AU$1.58, C$1.55, NZ$1.73
  • EUR Monthly highs: £0.87, $1.15, AU$1.54, C$1.51, NZ$1.65

 While the European Central Bank (ECB) opted to leave monetary policy on hold in June the mood towards the euro still picked up, given that the quantitative easing programme is set to wind down in December.
Investors were encouraged by suggestions from some policymakers that an interest rate hike could be on the cards in July 2019, although there was some disagreement over this timeframe.
Even with no imminent policy action on the horizon EUR exchange rates were buoyed by this continued shift towards hawkishness.
However, concerns remain over the underlying strength of the Eurozone economy in the wake of the weaker growth seen in the first quarter.
Escalating global trade tensions have weighed on exports in recent months, limiting the economy’s ability to recover its lost momentum.
With inflationary pressure across the Eurozone still failing to pick up as policymakers would like this gave extra fuel to more dovish members of the ECB.
Demand for the euro was also dented as the German ZEW economic sentiment index worsened, falling to a six-year low of -24.7 thanks to lingering trade fears.
Unless trade tensions show signs of easing this is likely to continue dragging on EUR exchange rates over the coming weeks.
If the US pushes forward with the imposition of fresh tariffs on EU products this could significantly dent domestic confidence, limiting the prospect of a recovery in growth.
As long as the Eurozone economy demonstrates signs of resilience, however, the downside potential of the euro should be limited.
Evidence that the economy was on a stronger footing heading into the third quarter could offer EUR exchange rates a solid rallying point.
Additional EUR volatility is expected in response to July’s ECB policy meeting, with investors looking for further signs as to the likely timing of an interest rate hike.
A more hawkish message could see the euro strengthen sharply, even though any rate hike is still not likely to come for some months yet.
On the other hand, any signs of reticence from President Mario Draghi may put the euro under renewed pressure.

Written by
Philip McHugh

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