The rally in the euro that built up during Mario Draghi’s press conference has proven to be fragile.
Having climbed as high as $1.2060, the euro is now back down at $1.20, still up by 0.73 per cent on the day, but clearly off the highs.
To recap on the past couple of hours…
The European Central Bank chief alluded to the uncomfortable strength of the euro several times during his post-decision press conference. Though he said the exchange rate is not a policy target, and he has no particular upper limit in mind, the rally in the currency does warrant close attention, due to the potential drag on inflation.
The market responded by buying euros anyway, as Mr Draghi also signalled that stimulus reduction is not so far away. (For analysis of this trade-off, see our earlier post.)
One factor potentially holding back further gains is that the ECB’s current growth and inflation forecasts are based on the exchange rate being at $1.18.
Interest rate futures now imply just a 34.2 per cent chance of any rate rise next year, according to Bloomberg data. That’s down from 46 per cent before the meeting started, and marks a fresh record low. (More on this here.)