EUR strength 'headache' for ECB

Matthew Ryan, CFA Ebury

The $1.20 level in EUR/USD has long been regarded as a particularly hard to crack, the key physiological level in the world’s most important exchange rate, but the pair soared through this level as if it was nothing during Asian trading on Wednesday. Of course, this is entirely a dollar story, with the move really having nothing to do with fundamentals in the Euro Area - believe it or not, the euro has actually lagged behind almost every other currency in the G10 in the past week.

As much as Trump and co. may be licking their lips at the prospect of a weaker greenback (given its implications for American export competitiveness), the recent strength in the euro may present a headache for officials at the ECB.

The value of the EUR/USD pair actually has far greater significance for the Euro Area economy than it does the US given its much higher reliance on exports as a share of GDP - ipso facto, the EUR/USD rally is a much greater net negative for the common bloc economy than it is a boost for the US.

The ECB will be meeting next Thursday, so expect President Lagarde to be similarly bombarded with questions regarding the implications of the dollar sell-off for the Euro Area.

Author

Matthew Ryan, CFA

Ebury

Matthew is Global Head of Market Strategy at FX specialist Ebury, where he has been part of the strategy team since 2014. He provides fundamental FX analysis for a wide range of G10 and emerging market currencies.

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