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The euro rose even further on Wednesday following European Central Bank’s (ECB) President Mario Draghi statement that the bank’s policies would be able to restore inflationary forces mending the deflation issue.

The currency is currently trading with a 0.2 percent gain to 1.1360 after Tuesday’s 10-month high of 1.4 percent to 1.1349 against the US dollar.

The euro also added 0.1 percent against the British pound to 0.8861 after closing 0.7 percent higher earlier day while sterling was up 0.07 percent against the dollar to 1.2820.

ECB’s Possible Policy Adjustment

The foreign exchange market seems to have awakened after Draghi’s comment of adjusting ECB’s stimulus policy during a conference in Portugal on Tuesday, making investors bet for a stronger euro to become firm.

The announcement may also be indicating that it would not be long before monetary policymakers will start discussing about pulling out the stimulus.

Draghi said that all the signs are now aiming to fortify and widen the recovery of the euro region and deflationary forces have been replaced with reflationary ones.

He described the inflation weakness as temporary and predicted that ECB will reach its target of just lower than 2 percent in the medium term. The damage from the crisis had weakened as well.

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The problem for ECB officials is that even with the fast growth of the Eurozone, the inflation rate is still low as it fell 1.4 percent in May, way below its under 2 percent mark.

Nevertheless, Draghi confirmed that their policy is working and the risks of the so-called hysteresis effects have subsided.

However, he added that any change in the ECB’s policy has to be done with caution since significant financial support is still necessary and the recovery in inflation will rely on positive global monetary states.

FX strategist Sim Moh Siong said that Draghi’s statement might also have indicated that the bank may announce a reduction to its considerable bond purchases in the following months, possibly by September.

He added that ECB probably will not want to see the euro to increase too fast as a push-back might happen if the currency increased quicker than what the bank prefer noting that ECB may point out the risk that the euro’s growth could put pressure on inflation.

Stronger euro means weak inflation?

Forex strategist of financial firm UBS said that the recovery in the Eurozone means that ECB is expected to tighten its policy over coming years, cutting stimulus and increasing interest rates could boost the currency in the process.

But, a stronger euro may weaken inflation by making imports somewhat cheap which could result to ECB being hesitant in further tightening the stimulus policy therefore stalling the euro’s rise.

The stronger euro may be affecting prices by now based on current inflation forecast.

UBS’ strategist stated that ECB’s latest 2018 HICP estimate was 1.3 percent which was lower than its March forecast of 1.6 percent.

He added that the reduction is possibly affected to some extent by the strengthening of exchange rate between inter-meeting period.

UBS estimated that the EUR/GBP rate will be 0.90 in three months, 0.92 in six months and 0.97 by the end of 2018.

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