Well, it was just a matter of time.
How many times over the past week have we said that “someone” is going to have to step in and put the brakes on the euro? Quite a few.
Especially given that European equities are starting to show signs of stress in the face of the common currency’s inexorable rise.
Sure, enough, Reuters is out with this:
Rapid gains by the euro against the dollar are worrying a growing number of policymakers at the ECB, raising the chance its asset purchases will be phased out only slowly, three sources familiar with discussions told Reuters.
The scheme is due to expire at the end of 2017 but formal talks over its future are only beginning, meaning the European Central Bank is highly unlikely to take any decision at next Thursday’s rate meeting, the sources said.
Pressure is building for a gentle rather than a rapid reduction in the pace of asset buying from some policymakers, particularly in the bloc’s weaker economies, who are concerned that the strong euro could dampen inflation and hamper growth by making exports dearer, the sources said.
“The exchange rate has become a bigger issue,” one of the sources told Reuters. “It is now less favorable for an exit and a stronger argument for a muddle-through option.”
And the reaction:
European equities popped a bit too, but let’s see how long this lasts. As Deutsche Bank noted on Wednesday, “for verbal intervention to be credible the ECB will need to abort its QE exit plans for October.”
That seems unlikely for all kinds of reasons including the message it would send about the ECB’s outlook for inflation and the economy, but technically speaking, Deutsche notes the following:
The current level of the euro would only require a 0.2% upward revision to European growth over the forecast horizon to maintain the ECB’s inflation path. It is only at 1.25 or above where tapering would be aborted (chart 7).
Monetary policy is simply not the main driver of EUR appreciation. The market is becoming more structurally optimistic on Europe versus the US and the ECB may not be able to do much about it.
And then there’s the fact that they’re bumping up against technical constraints with the bond buying.
In any event, they’re probably going to need to do a lot “better” than this is if they want to put the brakes on things and that goes double if the data we get out of the US disappoints.
