ECB UPDATE: Euro's Next Move Tied to Draghi at Jackson Hole

--Speech at Fed Symposium Could Cap or Spur Euro Rally

By Jack Duffy

     PARIS (MNI) - As European Central Bank President Mario Draghi heads to the

Federal Reserve's symposium in Jackson Hole, Wyoming next week, the near-term

direction of the euro and the pace at which the ECB moves to exit its E2.3

trillion bond buying program may both be hanging in the balance.

     The euro, at $1.18, has risen 11% against the dollar since the start of the

year and by 5% since Draghi's June 27 speech in Sintra, Portugal, where he

hailed the return of "reflationary" forces to the Eurozone. 

     The rise has been fuelled partly by the gains in the Eurozone economy

relative to the US, but also by Draghi's reticence to speak out and "talk down"

the currency. In contrast to May 2014 when he expressed "serious concern" about

the euro's strength, Draghi's only recent comment has been that the euro's climb

since June has "received some attention."  

     After touching at high of $1.1910 on Aug. 2, Draghi's signals in Jackson

Hole next week "could be the trigger either for further gains or for a deeper

correction lower," said Rabobank senior FX strategist Jane Foley in a client

note.

     To be sure, a stronger euro is unlikely to derail the ECB's exit from QE.

With the central bank facing constraints in the eligible assets it can buy, it

has little choice but to reign in the program. And with the euro rising for

"good reasons," i.e a stronger Eurozone economy, the central bank is likely to

tolerate a certain amount of upside in the currency.

     But the stronger euro is also set to cause a further downward revisions in

ECB staff inflation forecasts to be issued in September. Frederik Ducrozet,

economist at Banque Pictet & Cie in Geneva, estimates that staff inflation

forecasts will be cut to 1.1% from 1.3% for 2018 and to 1.5% from 1.6% for 2019.

     Ducrozet said that QE bond buying is likely to be reduced to E40 billion

per month from $60 billon in the first half of 2018 and to be fully wound down

by the end of the year. But in an "extreme case" where the euro climbs above the

$1.20-$1.25 range and holds there, "one cannot rule OUT that QE will be extended

into 2018 at its current pace," he said. 

     The strength of the euro, and its impact both on inflation and the

Eurozone's trade competiveness, is one reason why the ECB is expected to delay

its detailed announcement on the scale-back of QE until its policy meeting on

Oct. 26.  

     The euro's rise has made Draghi's communications task more difficult. He

has attempted to convince markets that the as the economy strengthens, the ECB

can gradually take stimulus off the table while leaving monetary policy

basically unchanged. The markets have not bought this argument and have pushed

the euro higher as a result. 

     At Jackson Hole, where he will speak on Aug. 25 at 1 pm local time, Draghi

has another chance to refine his message. Speaking at the venue where he set the

stage for massive QE bond purchases three years ago, that message could set the

tone and direction for the euro through the end of the year.  

--MNI Paris Bureau; tel: +33 1-42-71-55-41; email: jack.duffy@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

[TOPICS: M$X$$$,M$$EC$]