Euro Exchange Rate Slide Extends, Will Bottom in December

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The Euro remains under pressure as the October trend to weaken extends but an inflection point looms.

~ Euro to Dollar exchange rate: 1.0881
~ Euro to Pound exchange rate: 0.8909
~ Euro to Swiss Franc exchange rate: 1.0823
~ Euro to Australian Dollar exchange rate: 1.4295

The declines in the Euro exchange rate complex comes despite the fact that the ECB provided no clear indication that additional easing is certain in the future.

EUR/USD is trading at a seven-month low, below the 1.0915 low set around the Brexit decision in June.

EUR/GBP is meanwhile trading at a two-week low at 0.8905.

“Our view is that the market is not listening to the ECB,” says Peter Rosenstreich, head of market strategy at Swissquote Bank, “they hear the words but show no comprehension of their meaning”.

Rosenstreich describes the Euro’s reaction as being a ‘false negative’ who points out that over the past ten years, markets have become so conditioned to get currency debasing easing every time the inflation outlook deviates from the central bank’s target rate (in this case the ECB’s 2% target).

“Despite Draghi’s growing intellectual conflict, broader public disagreement on the effectiveness of the current monetary policy mix and the negative effect of distortion in financial markets, markets are still expected more easing,” says Rosenstreich.

The Swissquote analyst believes financial markets are simply projecting that the ECB must do something and that the action will be euro-negative, as the recent experience with the BoJ has shown currency traders.

2-year Eurozone-US spreads widened modestly after President Draghi poured cold water on the idea of that the ECB could reduce asset purchases.

Thomas Harr, Global Head of FICC Research at Danske Bank, observes positioning is not yet stretched short EUR/USD, which supports a greater role for relative rates.

“The political risks and relative monetary policy will weigh on EUR/USD where yesterday’s downside break of 1.0950 opens the door for further losses towards 1.0700-1.0850,” says Harr.

A decision on policy settings will be made in December and analysts agree that an extension of the programme beyond March of next year appears more likely than not, considering the ECB President noted that economic risks remain tilted to the downside while core inflation was showing no sign of a convincing recovery.

“We remain bearish on the outlook for the EUR. Fed-ECB policy divergence and weak seasonal trends for the EUR suggest 1.05 should be a fairly easy reach for the market into year end,” says Shaun Osborne at Scotiabank.

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