Cranfield: "This Was A Watershed Week For The Euro: Beware Of Getting Steamrolled"

After three days of fireworks for the Euro, when it first surged on Draghi"s hawkish comments, then tumbled on the ECB"s "clarification" to Bloomberg that the market had overreacted to Draghi, then continued to surge after Draghi himself did little to dissuade the market it was wrong, the common currency is now trading at above 1.14, or 1.1425 to be precise...

... the highest level in one year, and on a relentless push higher, as the dollar tumbles, because as Sean Callow, currency strategist at Westpac says, “it will take more than anonymous ECB sources to cool the desire to bet on the euro and dump the dollar,” and adds “many investors are tantalized by the prospect of key quarterly meetings in September producing no move from the Fed but a plan to wind down quantitative easing at the ECB.”

But how did we get here so fast, just a few months after virtually every sellside desk expected parity with the USD, and what"s next? Here are some thoughts from the latest "Macro View" by Mark Cranfield, former .FX trader who currently writes for Bloomberg.

Euro Is Dancing the Macron, Draghi Two Step:

This week could be seen as a watershed for the euro, the week when all the stars align to set up a powerful run in the second half of the year. 

ECB President Mario Draghi is acknowledging reflationary forces as investors are getting comfortable with improving European economic and political fundamentals.

The tectonic plates are shifting in favor of the euro, even if some ECB members are saying that markets are jumping to the wrong conclusions.

At the beginning of 2017, research notes were being circulated with scary maps of the European electoral earthquakes ahead, starting with the Netherlands in March.

It was going to be a roller-coaster year. The rise of populism had been given a steroid boost after the U.S. presidential election and European nations were poised to follow by electing their own version of Donald Trump. The old order was going to be toppled, even Angela Merkel seemed vulnerable.

Not quite, as it’s turning out. Even the threat of a destabilizing Italian vote seems to be evaporating.

The Trump effect isn’t coming through, and the new order is being led by a staunch European supporter called Emmanuel Macron. European politics is going from zero to hero.

What a contrast with the developments across the Atlantic.

Looking at a long-term picture of euro-dollar, one can see the potential for a major breakout as bullish momentum builds up. The pair has essentially been in a range between 1.05 and 1.15 for the past two and a half years after the huge collapse in 2014-2015. If it does break the top side it probably won’t be quietly.

When the world’s number two reserve currency gets rolling, it’s probably best to get on board or run the risk of being steamrollered.