The euro was stalled below the $1.12 threshold on Tuesday as London-based currency traders returned from a long weekend and sold the currency following dovish comments from Mario Draghi on the outlook for monetary policy.
The president of the European Central Bank stressed in remarks on Monday — when London and New York markets were closed — that the currency bloc still needed “an extraordinary amount of monetary support” in spite of its strengthening economic recovery.
His words — taken in combination with a possible early general election in Italy and renewed concern about Greece’s debt burden — sent the euro down by as much as 0.5 per cent to a day low of $1.1108, a six-session low. The currency recovered to $1.1160, still below its closing peak for May when it was worth $1.1236 and touched its highest level since November.
“Draghi was clear,” said Marc Chandler, strategist at Brown Brothers Harriman. “The improving economy is necessary but insufficient. The inflation outlook is still not on a self-sustained path toward the target.”
The euro has rebounded during May, buoyed by relief at Emmanuel Macron’s win in France’s general election and also tracking a trend of strengthening economic data.
That had raised hopes in some quarters of the currency markets that the ECB could find room to tighten monetary policy, perhaps even in the form of an interest rate rise coinciding with its reduction, or tapering, of monthly stimulus spending.
But Mr Draghi’s remarks have limited such hawkish expectations for the policy tightening cycle, just as concern about Italy and Greece return.
“An early hiking cycle from the ECB would have been a game-changer for the euro,” said George Saravelos, strategist at Deutsche Bank.
“But recent ECB commentary has confirmed American-style sequencing with tapering coming first. The Fed experience showed us that this is not particularly bullish for a currency.”
The euro faces a series of obstacles that are now coming into view for investors, taking the edge off its early summer rally.
The talks between Greece and its creditors need to be resolved before repayment deadlines in July. Next month, the market will get a better idea of Mr Macron’s ability to deliver his policy agenda when National Assembly elections take place.
At the end of the European summer comes the German presidential election, which could clear the way for eurozone fiscal stimulus, along with the ECB’s September meeting and the prospect of the first clear signs of tapering.
The ECB’s next policy meeting is due on July 8 in Tallinn. While it is not expected to overhaul policy then, some analysts were cautious on any extension of the euro’s rally against the dollar.
Yianos Kontopoulos, strategist at UBS, said: “From a trading perspective, risk-reward has diminished for the euro against the dollar and we would de-risk . . . and concentrate long positions against the pound.”