It has been a volatile month for the euro this month and focus has strongly been on Mario Draghi who was last year Forbes magazine listed as the 8th most powerful person in the world. Earlier this year the same publication
ranked him as the world’s second greatest leader.
High praise indeed, but has it all gone to his head? Having previously taken a morbid view of the European economy in order to weaken the euro and subsequently stimulate economic recovery, the head of the European Central Bank (ECB) swaggered into October by stating unequivocally that the eurozone had now returned to a period of sustained growth. Who was to thank for this? Mr. Draghi and the policy he and his team at the ECB introduced in January of course!
Mr. Draghi couldn’t take praise for lower than expected US non-farm payroll data causing the euro to make significant gains against the US dollar and sterling – the single currency hit its strongest level vs. sterling since May. The US economy confirmed that only 142,000 new jobs were created in September, compared to the estimate of 205,000. This huge disparity served to dampen expectation of a Fed rate hike before the end of the year.
As Mr. Draghi’s next speech on European monetary policy approached, investors were left wondering whether he would maintain his recent positive tone or resort back to a more cautious stance, in order to counter poor inflation figures. He ignored calls from institutions such as Citigroup to expand financial stimulus measures at this juncture, by announcing that he continued to back the eurozone – not once mentioning an increase in quantitative easing. The resulting ECB minutes indicated that any decision around this would not be made until at least December.
The euro experienced a far healthier outlook in the first half of the month, benefitting from poor economic forecasts elsewhere. Transparent growth expectations from China were followed by negative US employment figures, before the release of disappointing UK CPI data. The single currency even managed to shrug off poor results of its own after the ZEW Economic Sentiment surveys for Germany and the eurozone revealed a considerable decline in confidence in October, following the Volkswagen scandal. Investors were mindful, however, that the euros bullish run could end at any moment if economic reports from the currency bloc continued to underwhelm, thus increasing the possibility of further quantitative easing.
Investors’ concerns were soon justified. October 22nd saw one of the largest single movements in the GBP/EUR rate since the start of the year – even greater than the particularly volatile period surrounding a ‘Grexit’. Positive UK retail sales data, largely fuelled by the Rugby World Cup, preceded the shock assertion from Mr. Draghi that the central bank is considering adjusting its current stimulus measures – AKA more quantitative easing – in order to bolster economic growth and drive inflation higher. His comments caused the pound to move upwards of three cents against the single currency.
Following negative economic sentiment data earlier in the month, positive surveys released from Germany revealed that business conditions in Euroland’s largest economy are still thriving, despite Volkswagen’s diesel emissions scam. Any momentum the euro gained from this was stopped in its tracks when the US Federal Reserve signalled it may raise interest rates in December, when the ECB is widely expected to add to its stimulus. This reaffirmation of a contrasting direction in monetary policy between the two central banks saw the dollar take a cent and a quarter off the euro, and sterling add nearly one euro cent.
GBP/EUR exchange rates have had one of their most volatile months on record. Rates on offer swung repeatedly between concrete lows of 1.334 and absolute highs of 1.401, largely under the influence of potential ECB stimulus extensions and Fed rate hike expectations. The prospect of these events has significantly impacted the euros performance across the board, heightening the anticipation surrounding upcoming announcements by Mario Draghi and Janet Yellen.
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