The euro is still being treated as one of the strongest currencies amongst the majors; but is this potency really coming from the outlook for growth and interest rates? Today the European Central Bank (ECB) delivered no surprises in its decision to maintain its benchmark lending rate at 1.00 percent.
Comments to follow this pass noted that the current level of the region’s target rate was “appropriate,” and the future would likely hold an “uneven” recovery and “subdued” inflation. So, even though loan demand has diminished and the Euro Zone’s largest economies have already returned to growth, there seems little desire to rollback stimulus anytime soon. Overnight index swaps from Credit Suisse are pricing in 85.6 bps of hikes over the next 12 months; but this is likely to be come from firming well into next year. If the central bank continues to rest on its laurels, the euro will likely lose bullishness provided by its yield. If that is the case, the currency will increasingly fill a role as the counterpart of the US dollar – for better or worse.