The euro couldn’t quite match the strength of the British Pound but it had another strong day on Wednesday, rising to USD1.24 for the first time since December 2014. Overnight it has extended the rally to 1.2450.
Whilst the ECB worries about whether EUR strength will hinder progress towards its inflation objective by weighing down on the cost of imported raw materials and forcing exporters into more cost-cutting to remain internationally competitive, it seems to be doing no harm at all to the broader Eurozone economy.
Yesterday’s ‘flash’ PMI surveys were remarkably upbeat. The headline Eurozone PMI rose to 58.6 in January, up from 58.1 December and its highest since June 2006. An acceleration of service sector growth to the fastest since August 2007 was partly countered by a slowdown in manufacturing output growth, though the latter remained very buoyant. The latest three months have seen the strongest factory output increase since 2000.
In Davos, German Chancellor Angela Merkel and French President Emmanuel Macron both did the ‘vision thing’, most especially Ms Merkel who reminded delegates that 2018 marks the 100th anniversary of the end of the first world war. The political actors a century ago ‘sleepwalked’ into a crisis, Merkel said. “This generation born after the second world war will have to prove they have learned the lessons of history. That means remaining committed to multilateralism, working together to solve problems”.
Today is the first ECB Council Meeting of the year, with President Draghi giving his regular Press Conference at 1.30pm London time. Given the very strong upward momentum in the Eurozone economy, it is very hard to see how he can credibly warn against currency strength and argue for negative interest rates to be maintained until well into next year. This won’t stop him trying and he is a past master at finding new turns of phrase to keep markets where he wants them. It should be a fascinating but potentially very volatile afternoon.
The EUR opens in Europe this morning at USD1.2420 and GBP/EUR1.1495.