Market Outlook

Currency outlook: Is the Euro set to rebound?

The creation of a single common currency across the eurozone hasn’t been without its setbacks.

Over the last 20 years, the euro has fought itself out of a crippled economy with sluggish growth and fended off a stubborn minority of people that have opposed its existence.

When discontent was at its peak, almost 40% of the population across struggling member states such as Greece, Italy, Portugal and Spain turned against the european currency, according to the Financial Times.

Indeed, a recent paper published by monetary economists Carmen Reinhart and Kenneth Rogoff found that the eurozone’s limited unity posed difficulties for European Central Bank (ECB) policy.

The paper determined that it was a regional currency at best. “Interestingly, the euro’s international role is no greater than the German Deutschmark or the French franc that it replaced,” Reinhart and Rogoff concluded.  

“Interestingly, the euro’s international role is no greater than the German Deutschmark or the French franc that it replaced” - monetary economists Carmen Reinhart and Kenneth Rogoff

 

 

The euro’s big comeback

However, during Mario Draghi’s time as president of the ECB, some of the criticism levelled at the euro currency has lifted.

While the euro hasn’t grown into the international super currency that it was once thought it could be, trust in the ECB and in turn the common currency has grown.

According to the Eurobarometer, support for the euro is currently higher than it has been in the 20 years it has existed.

Throughout Draghi’s eight-year tenure, the bank has managed to maintain price stability somewhat, with the year-on-year inflation rate staying below 2%. However, the euro has fallen by 14.12% against the dollar during that time.

While the currency has continued that downward momentum throughout the year so far, October has seen some respite. Since the start of the month, the euro has risen as much as 2.64% against the dollar. A weakened dollar – set for its worst month since January 2018 as of 21 October ­­– and intermittent Brexit optimism pushed the euro currency higher. 

“Brexit has been doing a lot of the hard work in terms of moving things around,” Daniel Katzive, head of foreign exchange strategy at BNP Paribas, told CNBC.

“Whereas the impact of Brexit on sterling is obvious, euro-USD’s response to diminished Brexit fears has probably been larger than what we had expected. This suggests that a lot of the weakness in the euro over the previous few months was being driven by Brexit concerns and as those are reducing, we’re seeing the euro get closer to where we think where it should have been all along based on rate differentials.”

“Whereas the impact of Brexit on sterling is obvious, euro-USD’s response to diminished Brexit fears has probably been larger than what we had expected” - BNP Paribas head of foreign exchange strategy Daniel Katzive

 

Chris Kimble, founder and CEO of Kimble Charting Solutions, agrees. He tells Opto that the euro hit a key 18-year support line by mid-October that suggests it could continue to climb.

Kimble notes that if it breaks above this key resistance level (marked out on line three on the chart above), then it could prompt a short-term rally in commodities and metals based on historical performances.

Leading up to Draghi’s last meeting as president of the ECB on 24 October, the euro edged lower to $1.1120, while the dollar was flat at 97.547.

As such a significant figure in central banking, Draghi’s exit will ring loudly around the world’s trading rooms.

In his first year as president, Draghi told an audience in London that: “within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” Eight years later and looking at the current trajectory of the euro, it does appear to be on steadier ground.

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