Run Euro Run !

The euro’s rally may have only just begun.

While the European Central Bank made few changes Thursday to its forward guidance and Mario Draghi said that policy makers were still waiting for wages and prices to match the region’s improving economic growth, the common currency rallied to its highest level in nearly two years.

It’s the best performer among Group-of-10 currencies this year and could still have further to run with the bank likely to announce the scaling back of its quantitative easing program in either September or October.

“It’s an armor-plated rally and it won’t stop,” Peter Kinsella, a London-based senior foreign exchange and rates strategist at Commonwealth Bank of Australia, wrote in a note. “Everything speaks in favor of further EUR appreciation — increasing portfolio inflows, changing monetary policy, improved political risks.”

Increased hawkishness from the central bank, spurred by Draghi saying that reflationary forces had replaced deflationary ones on the continent, has helped the euro rally from lows last seen near the start of the millennium. Investors expect the ECB to start tapering in the new year and are pricing in a 10 basis point rate hike by September 2018.

At the same time, political risks have largely dissipated. The victory of market-friendly Emmanuel Macron in France allayed fears after a populist wave swept through the European Union following the Brexit vote and the election of Donald Trump as president of the U.S. Economic growth has also picked up, helping to buoy investor prospects.

The euro broke through $1.16 after Draghi said that the currency’s recent re-pricing had received “some attention,” without specifically saying he was concerned about its strength, at the press conference following July’s ECB decision. That reference helped boost the shared currency, while European bonds rallied following the meeting led by those of Spain and Portugal.

Mario Draghi “essentially did not push back on the market pricing, which was the key point,” said Jordan Rochester, foreign-exchange strategist at Nomura International in London. “The Fed was moving more aggressively in terms of their monetary policy while other banks were still easing. All that’s come into reverse now,” he added, referring to the Federal Reserve’s recent rate hikes.

The euro advanced 0.1 percent to $1.1642 as of 8:49 a.m. in London, having touched $1.1677, its highest since August 2015. The currency has climbed about 11 percent this year, partly on speculation that a tapering of bond purchases is drawing closer. It traded near its highest versus the pound in eight months with one euro worth 89.59 pence.

Nomura currently forecasts the euro at $1.15 by the end of the year. “In the short-term we’re overshooting and I wouldn’t fight it,” Rochester said.

For some analysts, the only thing that can stop a prolonged euro surge is events on the other side of the Atlantic. That could come in the form of progress of U.S. tax reform, according to Rochester.

“One factor that might stop the euro rally from here is a repricing of expectations for the Federal Reserve,” said Andrew Cormack, a London-based money manager at Western Asset Global Management. “There is so little priced for the Fed now any upside surprise in the data could see this reverse.”

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Germany Advances East

China for the first time became Germany’s most important trading partner in 2016, overtaking the United States, which fell back to third place behind France, data showed on Friday.

German imports from and exports to China rose to 170 billion euros ($180 billion) last year, Federal Statistics Office figures reviewed by Reuters showed.

The development is likely to be welcomed by the German government, which has made it a goal to safeguard global free trade after U.S. President Donald Trump threatened to impose tariffs on imports and his top adviser on trade accused Germany of exploiting a weak euro to boost exports.

German Vice Chancellor Sigmar Gabriel has even suggested that the European Union should refocus its economic policy toward Asia, should the Trump administration pursue protectionism.

“Given the protectionist plans of the new U.S. president one would expect that the trade ties between Germany and China will be further strengthened,” Germany’s BGA trade association said in response to the shift.

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