Euro may test year’s low with Draghi likely to change rhetoric

Spot market trends show that the curency could benefit from a Brexit resolution

The euro could revisit its year-to-date low as persistent political risks may lead Mario Draghi to refrain this week from painting a rosier picture for the bloc’s economy.

Market dynamics have shifted only slightly since the European Central Bank’s last meeting, yet not in a supportive way for the common currency. Data may be suggesting the forecasts for growth are broadly on track with the Governing Council’s projections, but on the other hand subdued inflation, early signs of contagion in peripheral bonds, deadlocked Brexit negotiations and a hawkish Federal Reserve could mean the euro could test its $1.1301 mid-August low.

Draghi said he sees a “relatively vigorous” pickup in underlying Euro-area inflation following the September monetary policy decision and while wage pressure is building, the pass-through to prices is yet to be seen. At a time when the market looks behind the curve when it comes to additional US tightening, there may be little room for the ECB president to downplay monetary policy divergence projections at the next gathering on October 25.

Price action in the spot market this month showed that the euro could benefit from a Brexit resolution. UK and EU officials keep kicking the can down the road however as obstacles remain, with focus now turning to a December EU summit, as volatility shows. European Council President Donald Tusk and European Commission President JeanClaude Juncker present conclusions from the October 18-19 summit to the EU Parliament this week, with the bar high for a positive surprise.

For the short-term, investors are looking closely at the performance of euro-area peripheral bonds as the rift between Italy and the EU widens. Italy’s 10-year yield spread over Germany touched the highest in more than five years following a letter from the European Commission to Rome that said its spending plans were excessive. While resilience was the name of the game initially, Spanish bonds led the widening versus bunds on Thursday and the 10year Portugal yield rose by 8 basis points Friday to 2.11 per cent, highest since May.

The euro hit $1.1433 on Friday, flirting with a two-month low.

euro’s value against US dollar in mid-August