-Weidmann calls for prompt end to ECB QE, cheers Eurozone growth.

-Tacitly approves of markets expectations for June 2019 rate hike.

-Strategist sees neutral outlook for Euro-to-Dollar rate this week.

Above: Jens Wiedmann (Left) with ECB President Mario Draghi. © European Central Bank

The Euro bobbed higher against its international rivals in morning trading Monday as risk assets recovered from the previous week’s jitters and traders responded to the latest commentary on Eurozone monetary policy from German Bundesbank President, Jens Weidmann.

Weidmann, who is also renowned as one of the European Central Bank governing council’s more hawkish members, signalled tacit approval of market expectations for an initial Eurozone interest rate rise in June 2019 and also advocated for a prompt end to the ECB’s quantitative easing program during a speech at the Austrian central bank in Vienna Monday.

“The markets see a first rate hike around the middle of the year 2019, which is probably not entirely unrealistic. However, the end of net purchases is only the beginning of a multi-year process of monetary normalization. That's why it's so important to actually start soon,” Wiedmann told the audience.

The European Central Bank's QE program and low interest rate policies drove international capital out of the Eurozone and hit the Euro currency hard in the years between January 2015 and June 2017. While the Euro has partially recovered over the last nine months, further upside will be contingent on an end to QE and an eventual interest rate rise materialising. Wiedmann, as the head of Germany's central bank, has a powerful voice in this debate on Eurozone monetary policy so markets tend to listen keenly whenever he speaks.

"Given that Mr Weidmann is one of the most hawkish members of the Governing Council, the timing of the exit may ultimately be even slower than he suggests. Indeed, the more dovish members – such as President Mario Draghi and Chief Economist Peter Praet – have emphasised downside risks to the trajectory of inflation because of evidence of more slack in the labour market," says Nick Kounis, head of financial markets research at ABN Amro.

The ECB bought €60 billion or more of Eurozone bonds per month during the years between January 2015 and January 2018, in an effort to spur a recovery of inflation. It launched the program in response to several years of falling inflation, which saw consumer price growth turn negative in 2015.

QE is thought to incentivise greater economic activity by forcing down bond yields and reducing borrowing costs for those in the “real economy”. This, in turn, is thought to spur inflation and help the central bank fulfil its mandate to keep the consumer price index close to but below 2%. Only when inflation makes a sustained return toward its target can the ECB contemplate an interest rate rise, which is key to further gains for the Euro.

“ECB economists expect the inflation rate to be 1.4 percent each in 2018 and 2019, and to rise to 1.7 percent in 2020, a level that is broadly consistent with our medium-term definition of price stability. Against this background, it is not surprising that the financial markets have been expecting net bond purchases to end in 2018,” Weidmann says, in his speech.

The ECB reduced the rate of monthly purchases to €30 billion per month in January 2018 and said this reduced pace would continue until “September 2018 or beyond.” Analysts are divided over whether it will cease intervention in the bond market in September, or hold off until the fourth quarter before turning off the funny-money tap.

"We continue to think that the ECB will set out a clear roadmap for the end of its asset purchase programme in June/July. We expect a tapering period of 6 months (3 months EUR 20bn p/m and 3 months EUR 10bn p/m). We do not expect the first rate hike to follow until the second half of next year (10bp in September and another 10bp in December)," Kounis adds.

The Euro-to-Dollar rate was quoted 0.42% higher at 1.2400 shortly ahead of noon Monday, up from the 1.2360 level it opened the session at, although the Euro-to-Pound rate was down 0.20% to 0.8718. The Euro was higher against the Japanese Yen, Swiss Franc and Canadian Dollar.

“We retain a neutral to modestly higher bias for EUR/USD in the near-term amid a politically weak dollar backdrop – although given the potential dent to investor confidence ensuing from the threat of a global trade war, we note that there is heightened emphasis on EZ macro data staying resilient and EZ political risks remaining low to ensure that the EUR’s procyclical rally does not lose any steam. On the latter, weekend reports hint that some progression has been made towards forming a government in Italy,” says Viraj Patel, an FX strategist at ING Group.

Last week, a series of forward looking indicators that attempt to predict the future health of the Eurozone economy all took a bearish turn lower. The IHS Markit purchasing managers indices measuring changes in the Eurozone manufacturing and services industries both pulled back markedly during March as economic momentum waned, the strong Euro hit export demand and fears of a possible trade war dented optimism among companies.

These factors culminated in March’s IHS Markit Flash Eurozone PMI showing business activity growing at its slowest pace for over a year, which hit the Euro during Friday trading, although this still leaves sentiment and activity levels close to multi-year highs. And the economic growth outlook remains bright, according to Weidmann.

“Perhaps most striking is how much the economic situation in the euro area has improved. The upswing is now everywhere on broad feet; the growth rates of the Member States are now scattering noticeably less. The unemployment rate has fallen to 8.6 percent, its lowest level since the end of 2008. The sentiment indicators continue to move at very high levels. This indicates that the favourable economic development continues for the time being. Experts at the ECB staff estimate GDP growth of 2.4 percent this year, 1.9 percent in 2019 and 1.7 percent in 2020,” Weidmann says, in his speech Monday.

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