Aggressive monetary policy, which really began with negative rates in June 2014, has promoted a substantial depreciation in the value of the common currency, notes CIBC World Markets.
"The euro is now 18% lower versus the greenback and 11% weaker on a trade-weighted basis since negative rates were adopted. That’s a much better outcome than those in other jurisdictions and given the central bank’s battle with stubbornly low inflation, the euro’s reaction has been a very welcome development," CIBC adds.
"Consequently, a modest rebound following the July ECB meeting, which equated to approximately 50 bps of monetary tightening, was somewhat unsettling for policymakers and resulted in board members leaving the door open for additional stimulus following the September meeting. As evidenced by their revised inflation forecasts through to 2017 (HICP is only expected to reach 1.7% in 2017), the central bank is very cognisant of the deflationary pressures prevailing in the monetary union," CIBC notes.
"However, at this juncture, it’s more likely that the ECB was trying to talk down the currency, rather than signal that an extension of bond purchases was imminent. Nevertheless, both verbal intervention from the ECB and the clear divergence in monetary policies with the US will keep pressure on the euro and cause it to depreciate to about 1.07 versus the greenback later this year," CIBC projects.
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