Home > Euro’s Strength Worrying the ECB

Euro’s Strength Worrying the ECB

August 24, 2020 By Mircea Vasiu

Euro has seen strong interest from investors during the COVID-19 pandemic. It trades with a bullish tone since March and gains across the FX dashboard. 

The rally is mostly visible against the USD. The EURUSD’s rally stopped just shy of 1.20, but the pair keeps an eye at the highs. Other Euro pairs trade with a bid tone too, as a strong Euro became a common theme – EURJPY trades at 125 while EURGBP keeps holding the 0.90 level.

The ECB is unlikely to be happy.

Euro Bears Expecting the ECB to Intervene

It would not be the first time when the ECB intervenes to stop the EUR appreciation. During an economic crisis, a strong currency acts as an impediment to the recovery, with exports being affected. So far, the 1.20 acted as the trigger of the ECB’s verbal interventions.

If we look back in time, the ECB hinted that EUR is too strong at 1.20 for the first time in 2017. Back then, the EURUSD advance was triggered by Macron’s election in France.

In fact, the Euro gapped higher across the board on Monday’s opening as the 2017 French elections took place over the weekend. It hit 1.20 and above a few weeks later, leaving the gap open for years.

At first, the ECB hinted that the strong Euro became a concern for some Governing Council members. Then, one of the most influential ECB members at the time, Bernard Coeure, suggested that a strong EUR may weigh on inflation. Long story short, the EURUSD peaked at 1.25 and a decline back to 1.05 area followed in the upcoming years.

Fast forward to 2020, many things changed. First, neither Draghi nor Coeure, are not part of the ECB anymore. Draghi did not raise the interest rates on the Euro during his eight years mandate.

Second, Europe enjoys a strong momentum since the Recovery Fund, the EU Green Deal, and the joint debt announcement. Funds started to pour in from everywhere, as investors around the world look for higher yields wherever they may find them. In order to buy European assets, one must have Euros, so the bid for the Euro pairs is explained.

From a technical perspective, the EURUSD’s bullish trend remains intact. The correction from the 1.1965 high is just that – a correction. Unless it retraces below 1.15, the bias is that it will try again at the magical 1.20, where some form of ECB intervention is expected.