Weekly Market Outlook

Euro Trades Close to Post-Brexit Low on ECB Stimulus Speculation

The euro touched a three-week low against the dollar before the European Central Bank meets Thursday amid speculation policy makers will signal further stimulus to counter fallout from Britain’s vote to leave the European Union.

The 19-nation currency traded close to the weakest level since the June 23 Brexit vote. While the region’s central bank is forecast to leave its key interest rate unchanged, many believe it’s only a matter of time before the ECB acts. Derivatives prices show a 52 percent likelihood of a cut by October, the same month that Italians and Hungarians will hold national referendums on European issues. Although the region still runs a current account surplus, a report Wednesday showed it narrowed in May.

“The ECB is going to have to come up with more stimulus, more quantitative easing, keeping their rates lower,” said Chris Gaffney, president of EverBank World Markets, said in an interview in New York. Even if further easing occurs, the euro has probably found a short-term bottom near $1.10, he said.

The euro fell 0.2 percent to $1.1000 at 1:43 p.m. in New York, and reached $1.0982, the lowest since June 27. It has declined about 3 percent since the U.K. referendum vote.

Net Shorts

Wagers on a decline in the euro exceeded those on a rally by 87,660 contracts in the week ended July 12, Commodity Futures Trading Commission data show. That’s an increase from 75,327 contracts in the prior week and the biggest net short position since January. A short investment is a bet that an asset will decline in value.

The euro region’s current-account surplus shrank in May to 30.8 billion euros from a revised 36.4 billion euros in April. The ECB forecast that the region’s surplus will be equivalent to about 2.9 percent of its economy this year.

“Do we start to see downward pressure coming on the euro even with the current account surplus? Yeah, actually I do,” Simon Derrick, chief currency strategist at Bank of New York Mellon Corp., said in an interview with Bloomberg Television.

Even with the U.S. election heating up, political risk is still greater in Europe as populist movements like the one that brought the U.K. out of the E.U. spread to other countries, said Neil Jones, London-based head of hedge fund sales at Mizuho Bank Ltd.

“There is a fear of a domino effect running through countries like France, the Netherlands, Germany,” Jones said, predicting more money will flow into the dollar. “For the next three months, I’m looking for the euro to fall further.”