(Bloomberg) -- Currency traders looking to Jerome Powell and Mario Draghi for direction are getting the clearest signals yet that the dollar is set to extend its gains versus the euro.
That bet is being fueled by a divergence between the Federal Reserve chairman’s hawkish stance Wednesday and the European Central Bank president’s dovish posture Thursday. The disparate policy paths and contrasting fundamental trends in the U.S. and Europe are setting up a test of the key $1.15 level for the euro-dollar exchange rate in the weeks ahead, according to strategists at Charles Schwab & Co. and ABN Amro Group NV.
The greenback has “a little room to run” still, said Kathy Jones, New York-based chief fixed-income strategist at Charles Schwab. “We have seen softer numbers out of Europe and firmer numbers out of the U.S.”
The Bloomberg Dollar Spot Index rose as much as 0.7 percent Thursday to its highest since November after the ECB pledged to keep interest rates unchanged at current record lows at least through the summer of 2019, even as it phases out bond purchases by the end of the year. The move comes a day after the Fed raised interest rates, ratcheted up rate projections for 2018 and 2019 and sounded an optimistic note on the U.S. economy. The greenback has risen 2 percent this year, rebounding after an almost 9 percent loss in 2017.
Here’s what others had to say about the euro-dollar outlook:
- “We expect EUR/USD to decline towards $1.10 in September 2018 because of long euro liquidation and a continuation of positive economic developments in the U.S.” said Georgette Boele, a currency strategist at ABN Amro in Amsterdam. “The investment community is still long euros so some of them are closing their positions”
- The ECB’s date-based, dovish guidance is “a material negative development for the euro,” George Saravelos, global co-head of FX research at Deutsche Bank, wrote in a note
- The bank’s conviction that the lower end of EUR/USD’s 1.15-1.20 range will hold “has now been materially reduced”
- For Alessio de Longis, a money manager in OppenheimerFunds Inc.’s global multi-asset group, “the rate guidance was definitely a surprise -- I don’t recall the ECB ever giving calendar-based guidance”
- Expects EUR/JPY to decline and sees the euro regaining its appeal as a funding currency
To contact the reporter on this story: Lananh Nguyen in New York at lnguyen35@bloomberg.net
To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Elizabeth Stanton, Boris Korby
©2018 Bloomberg L.P.
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