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Euro picks up after knock from ECB

The euro has shaken off the dent it suffered on signs that the European Central Bank is uneasy about the risk of an overshoot.

The currency dipped on Thursday after minutes of the central bank’s latest policy-setting meeting showed concern that pulling back from stimulus measures could fuel an uncomfortable rally.

“Concerns were expressed about a possible overshooting in the repricing by … markets, notably the foreign exchange markets, in the future,” the minutes said. (More on that here.)

But on Friday, the currency was steady on the day against the dollar, at $1.1728, up from its $1.1660 low struck on Thursday.

Naturally, analysts have been chewing over the implications of the ECB’s stance.

Rabobank writes:

There had been a discussion about the exchange rate, [with] concerns mainly focused on future risks of overshooting. At the same time, the Council noted that the sovereign and corporate markets have been fairly resilient to the repricing of the risk-free curve. In that sense, the Council members did not seem overly concerned about immediate risks and we continue to believe that current financial conditions will allow them to proceed with a ‘tapering’ announcement in autumn.

Crucially, we believe that the mention of ‘risks of overshooting in the future’ lends support to our view that the Governing Council will use its other instruments to contain the risks of an unwarranted tightening of financial conditions as a side-effect of such a ‘tapering’ plan. More specifically, we believe that the ECB will have to further decouple the interest rate policy from its asset purchases.

We believe… the ECB may need to keep interest rates at very low levels for a substantial period after the asset purchases have stopped.

Simon Derrick at BNY Mellon says the market is “not quite listening” to the ECB, and it’s worth watching closely:

While it seems unlikely that Draghi will use his speech at Jackson Hole to address policy issues it is also clear that the most effective way the central bank can tackle unwanted euro strength will be to start downplaying the likelihood of any reduction in the asset purchase programme.

Given that ECB policy decisions have been behind a number of the more volatile sessions seen over the past three years it would therefore seem to make sense to listen particularly closely for any rhetoric on this theme over the next few weeks.