Talk is Cheap, Unlike the Euro

by on April 15, 2014 12:14 pm BST


For the last several months, the European Central Bank (ECB) has jawboned market participants to death on what it could do if the euro got to pricey. There is not a day that goes by (or so it seems) that five blurbs throughout the day hit my feeds about some ECB official talking about an impending quantitative easing program. But, as the months ago by, traders call ECB President Mario Draghi’s bluff. The euro has been able to remain in an elevated range, largely between 1.3700 and 1.3900, amidst central bank jibber-jabber.

The elevated euro has caused pricing instability as it has cheapened imports and made exports more expensive, thus less competitive. And the eurozone, growing at a mere .5 to one percent, is less competitive. It is, also, causing difficulties at the eurozone is flirting with lower inflation levels, currently at .5 percent.

Draghi & Co. has suggested that there are a myriad of tools the central bank, ranging from negative deposit rates and the more extreme asset purchasing program. Market participants have been telling Draghi that talk is cheap, and the euro has gained roughly six percent against the dollar in the last year.

According to Athanasios Vamvakidis, head of G10 FX strategy at Bank of America-London, said “the market will need to see action for the euro to weaken substantially.” Draghi aimed to make it clear that the exchange rate of the euro is not a key mandate of the ECB, but it always seems to be at the forefront of the discussion.

The euro’s ascent has been decreasing consumer prices in the region, and the year-over-year consumer price index (CPI) data will be released tomorrow. Economists are expecting it to remain at .5 percent, but a down tick by a tenth-percent would continue the trend lower. “ECB governing council members have made clear that the central bank is very much prepared to ease further, but wants to see how inflation data plays out in the next couple of months before deciding,” said BNP Paribas strategist Kiran Kowshik.