End of European Central Bank’s reign as dovish bastion likely to spark rebound for euro

The euro fell about 7 per cent against the US dollar last year, when the greenback rallied in anticipation of higher interest rates from the Federal Reserve

The euro is projected to climb as high as $1.20 by year-end, as ECB officials change their tune on the central bank’s outlook. Reuters
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The end of the European Central Bank’s reign as one of the pre-eminent doves among monetary-policy makers could kindle a rebound in the euro.

Dustin Reid, chief fixed income strategist at Mackenzie Investments, which oversees about C$200 billion ($156bn), said he sees the euro climbing as high as $1.20 by year-end, as ECB officials like president Christine Lagarde change their tune on the central bank’s outlook.

That’s compared with a median Bloomberg forecast of $1.16 for the fourth quarter and a Friday spot price of about $1.13.

The euro fell about 7 per cent against the US dollar last year, when the greenback rallied in anticipation of higher interest rates from the Federal Reserve.

“You’re starting to see the boat turn a little bit,” Mr Reid said at the TradeTech FX US conference in Miami.

“Some of the language we got from Ms Lagarde during the press conference at the February meeting I would’ve expected at the March meeting, and she definitely left the door open in terms of being a little bit more two-way in the outlook.”

On Friday, traders holding out for a hawkish ECB pivot got a glimpse of hope following a report that more bank officials are conceding that interest rates will likely need to rise late this year, helping the euro climb off an intra-day low. Money markets are now pricing in 44 basis points of tightening by year-end, compared with 42 basis-points on Thursday.

While the common currency has climbed nearly 1 per cent against the greenback in February, most of those gains came in the run-up to February’s ECB meeting and the pair has trended lower since then. A measure of one-year put- and call-option demand has grown less bearish on the euro in the past month, even as near-term sentiment is weighed down by geopolitical tensions on the continent.

“The market will get very aggressive in terms of baking in hikes for Q4 of this year, and definitely for the first half of ‘23,” Mr Reid said. “So rightly or wrongly, I think that’s setting up to be a relatively constructive tone for euro-dollar.”

Updated: February 19, 2022, 4:30 PM