Flailing euro is unlikely to find any succor from ECB meeting

[BRUSSELS] The euro has been treading water. It is unlikely to find a rescuing hand from the European Central Bank, whose policy makers meet next week.

While analysts expect the shared currency to strengthen as the year progresses, conviction in that view is shaky, with strategists having pared their calls recently. The euro was knocked down after the ECB's mid-June policy review, when President Mario Draghi dashed expectations for tightening in early 2019. Since then, trade tensions have heightened and core inflation in the euro area has been revised downward, which gives the ECB little incentive to change tack any time soon.

The policy divergence between the Federal Reserve and the ECB is another factor that is curbing enthusiasm on the euro. Shorter-term bond yields, which are usually more sensitive to changing views on monetary policy, are in favor of the dollar: the two-year yield differential between US Treasuries and German bunds widened this week to more than 300 basis points, the most in data going back to 1990.

The euro has weakened about 2.5 per cent so far this year and has been confined to an about 300-pip range since May. The currency was at US$1.1700 on Friday. The median forecast in a Bloomberg survey is for it to climb to US$1.1800 by the end of this year, but this prediction is lower than the US$1.2600 forecast in May.

Concerns that the current tariff spat between the US and China could transform into a currency war is likely to draw concern from the ECB. Policy makers "will focus on potential communication on the short-term downside risk stemming from protectionism," Danske Bank analysts including Piet PH Christiansen said in a client note this week.

The European Central Bank is expected to keep monetary policy unchanged on July 26; Mr Draghi could warn on protectionism.

BLOOMBERG