Important Links

Why Soaring Euro Is Causing Concern For The European Central Bank - Citi UK

3 October 2017FXEconomicsEurope
Soaring Euro Concerns for ECB - Market Insights - Citi UK

Why the soaring euro is causing concern for the European Central Bank

By Citi Analysts

  • The euro has risen 13% against the US Dollar in 2017
  • The rise of the euro has the European Central Bank (ECB) concerned
  • Low inflation rates will likely see the ECB taper spending to manage risk

The rise of the euro against the US dollar has accelerated over the summer. In fact, when European Central Bank (ECB) president Mario Draghi announced earlier in September 2017 that a drastic change in quantitative easing spending was unlikely, the currency still climbed to a two and a half year high. But while this strong performance sounds like a big positive for the eurozone, the ECB continue to voice concern about this rapid rise.

Citi analysts believe that's because the exchange rate of the euro is currently rising at a rate which doesn't correlate with actual economic growth. As such, some of the tactics which have been used to boost the economy as of late will need to be curbed in order to bring the euro back to optimum inflation levels. The weakness of the euro benefits the exporting countries and has helped foster the economic recovery.

Why is the euro currently so strong?

The euro has been strengthening as the market is pre-empting the normalisation of monetary policy; at current the ECB has a quantitative easing programme of €60bn, and interest rates of minus 40bps (basis point). The expectation that Mario Draghi will announce the gradual normalisation of policy, thus removing the stimulus, has led to the euro strengthening from the lows seen at the start of 2017 (EURUSD 1.0342).

Citi analysts also believe the uncertain political climate in the US has been another boost to the euro, which has benefitted from the USD's steady decline. The US dollar had begun 2017 benefiting from the "Trump-trade"; the expectation that fiscal stimulus from infrastructure spending and tax reform in the US would benefit the USD. However, this has yet to materialise, with Trump only recently announcing the eagerly anticipated US tax reform.

Despite the gradual impact of these longer term situations, more volatile events are unlikely to make the same lasting differences. While the USD's value may currently be affected by political tensions in North Korea, a Citigold study shows that the impact of similar political incidents on the economy is generally limited to the short term – typically a brief dip before a recovery soon afterwards.

Why is this considered bad?

Should the euro continue to rise, it could also be bad news for economic activity. The higher the euro, the more expensive it becomes for outside countries to trade, and a drop in exports would weaken growth, thus slowing the recovery

What happens next?

Because of these concerns, any move by the ECB will be a gradual process over the long term. Belts will likely start to tighten to avoid lowering inflation any further, which means a probable tapering of monthly quantitative easing spending. However, the ECB will likely want to retain as much flexibility as possible into the New Year.

Citi analysts expect that Inflation forecasts for 2018 and 2019 will be cut, but future plans are still to be clarified in October. Some asset purchases would still need to continue to avoid any drastic drop in inflation rates, and that should offer some comfort to traders importing to the UK.

Despite these concerns, our analysts remain cautiously optimistic about European equities. An improving earnings outlook and good dividend yield are both positives for the currency, which maintains an attractive valuation relative to the USD.

Read more about optimising your portfolio to minimise risk in uncertain climates, and remember that your Relationship Manager is always on hand to discuss any concerns.

Our recent research

Yield Curve Flattening Spooks Markets

The spread between 3- and 5-year yields fell to -0.7 bps on Monday, dropping below zero for the first time in more than a decade.

Find out more

Fixed incomeHighlightsEconomics

Time in the Market vs Timing the Market

Given the increase in price volatility, investors may think that market timing during a late-stage bull market may sound like a good idea but history suggests that there is no 'right time' to try timing markets.

Find out more

HighlightsEconomics
Impact of Fed rate hikes on Japanese equity shares - Market Insights by Citibank UK

What's Next for Japanese Stocks?

What could happen to Japanese equities as markets eye an end to US rate hikes?

Find out more

Japan

Take the first steps to your wealth management planning with Citi

Speak to a Relationship Manager
0207 500 1992

Already with Citi? Contact your relationship manager or view product availability on Citi Online

Why choose Citi

A relationship - not just a bank account

A dedicated Relationship Manager giving you access to our internal team of product experts and all our benefits

Access to exclusive Citi products

A range of current and investment products available both on shore and offshore, in the currency of your choice
Multi-currency accounts
Investment products

Global services for a global lifestyle

Our team is here to support you getting started in UK or with International travel and relocation
Moving to and from the UK
Travelling overseas

Offshore investments

We offer a diverse range of banking and investment services, including for those who want access to offshore investments

Find out more

Just moved to the UK?

We can save you time money and hassle. If you are a foreign national in the UK, Citi's International Banking Service can help you manage your money, home and away.

Find out more

Investment products are not insured by any governmental agencies, are not bank deposits, and are neither obligations of, nor guaranteed by, Citigroup, or any of its affiliates, unless otherwise stated. Investment products are subject to investment risks, including possible loss of some or all of the principal amount invested. Past performance is not indicative of future results, investments can go down as well as up.

“Citi analysts” refers to investment professionals within Citi Research (“CR”), Citi Global Markets Inc. (“CGMI”) and voting members of the Citi Global Investment Committee. Citibank N.A. and its affiliates / subsidiaries provide no independent research or analysis in the substance or preparation of this document. The information on this page has been obtained from reports issued by CGMI. Such information is based on sources CGMI believes to be reliable. CGMI, however, does not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute CGMI’s judgment as of the date of this page and are subject to change without notice. This page is for general information purposes only and is not intended as a recommendation or an offer or solicitation for the purchase or sale of any security or currency. No part of this page may be reproduced in any manner without the written consent of Citibank N.A. Information on this page has been prepared without taking account of the objectives, financial situation, or needs of any particular investor. Any person considering an investment should consider the appropriateness of the investment having regard to their objectives, financial situation, or needs, and should seek independent advice on the suitability or otherwise of a particular investment. Citi Research (CR) is a division of Citigroup Global Markets Inc. (the "Firm"), which does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this information. Investors should consider this information as only a single factor in making their investment decision.

Opinions expressed herein may differ from the opinions expressed by other businesses or affiliates of Citigroup, Inc., and are not intended to be a forecast of future events, a guarantee of future results or investment advice, and are subject to change based on market and other conditions.