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Not backing down: Euro breaks new highs above $1.1650

This break higher euro may not be exactly what European Central Bank chief Mario Draghi had in mind. But it’s no blip.

The currency rushed higher yesterday after the central bank kept policy on hold and signalled it was heading towards the exit from super-stimulative policy only with extreme caution – a set of comments judged mostly to be dovish.

But in his press conference, Mr Draghi repeatedly passed up the opportunity to dent the strength in the euro seen since late June, saying only that the potentially inflation-denting climb has “received some attention“.

Now, the currency is still flying high at $1.1656, up 0.2 per cent on the day and well up from under $1.15 before yesterday’s press conference. Today’s high is a nose above yesterday’s, and a new two-year high.

Analyst Gilles Moec at Bank of America Merrill Lynch suggests that Mr Draghi had no choice but to allow the euro to keep climbing:

Don’t forget that the central bank last month chose to remove its easing bias on policy rates, which means that any attempt of seriously talking the currency down would have come with its own credibility issue.

But it’s still awkward:

A stronger euro will be a major issue for the ECB. The appreciation in the currency, relative to the June forecasts, to 1.15 against the dollar (1.09 in the June assumptions), could force the central bank to revise its inflation projections down by at least 25/30 bps.

This, in our view, combined with the very cautious message from Draghi on inflation, strengthens our call for a very slow pace of tapering from January 2018 onward.