Fundamental Forecast for Euro: Bullish

The European Central Bank meets for a rate decision to be announced this upcoming Thursday. As has become usual around these announcements, there is little expectation for any actual moves on rates: But the bigger issue at bay is whether or not the ECB is encouraged enough by the continued growth in the European economy to begin thinking about exiting from the massive stimulus outlays of the past few years, and this could begin to show up in the ECB’s updated economic projections which will likely be the primary focal point of next week’s rate decision.

As we wrote, there’s a pronounced case of divergence between what ECB President Mario Draghi has been saying and price action in Euro-markets. The Euro has put in a steady stream of strength throughout 2017 against most major currencies, and throughout this period, Draghi has appeared rather unmoved by stronger growth, rising inflation and improvement in the labor force. With economies in Northern Europe at more advanced stages of recovery, there are legitimate fears of ‘overheating’ as asset prices get even-more elevated while labor markets remain tight. Meanwhile, much of Southern Europe is at an earlier stage of recovery, and with unemployment remaining around or above 10%, they’d likely want a more passive approach from the European Central Bank to assure that this recent trend of growth remains.

This has created bifurcation around the topic of stimulus within Europe and even within the ECB. Just yesterday we heard from Sabine Lautenschlager who sits on the ECB’s executive board. Ms. Lautenschlager remarked that ‘all ingredients for an appropriate increase in prices are present, ’ going on to remark on the prospect of exiting stimulus, ‘hesitating for too long only creates problems.’ Yesterday also brought comments from Jans Weidman, the head of the Bundesbank, who directly said that the ECB is starting to debate whether to reflect the improving economic data in Europe in its policy guidance. And even German Chancellor Angela Merkel opined around the matter recently, when she said last week that the value of the Euro is ‘too weak’.