Expert Commentary: Focus on EUR

This year the Euro zone economy expanded at a strong pace. Do you expect the ECB to start tapering anytime soon or not?

We do expect the October announcement to reveal that the ECB is extending its QE program into the next year, however, at a slower pace, which the ECB itself does not describe as tapering. We would call it a rescaling or recalibration. But overall we do think that conditions are met for asset purchases to be slowed and eventually terminated by the end of the next year.

Some analysts suggested that the strong Euro had a little impact on trade between the EU and the major economies. Do you agree with the statement?

I am of the same opinion. For many reasons we believe that the cyclical and structural effects of changes in the currency have diminished over the past two years to some extent due to globalisation and a decreasing pass-through of the currency on exports. Another thing is that the region has become more resilient to any external shocks, as it is now more reliant on domestic demand.

Experts anticipate the EU economy to maintain its stability up to the moment when the UK quits the bloc. Do you share this point of view?

I do share this point of view. Over the very short term, it has been clear that the effect of the future Brexit agreement has been felt more significantly in the UK than in the Euro area. As the matter of fact, the UK growth has slowed, while the Euro area’s growth has strengthened. So there has been this kind of divergence between the two.

Over the medium term, however, it all depends on the features of the future post-Brexit framework. Still, even at the assumption of a soft Brexit, the impact will be much more significant on the British economy rather than the EU in terms of trade and potential growth.

Where do you see the Euro against it major rivals by the end of 2017?

We think it could depreciate a little bit further in the short term. We expect the Euro to go down closer to 1.15 against the US Dollar by the end of this year.

Over a longer term, we expect a further rebound, because the equilibrium value of the Euro against the US Dollar is above 1.20, at least in our view.

Frederik Ducrozet

Senior European Economist at Pictet Wealth Management