The European Central Bank will have to print and sell euros in the currency markets to alleviate the pain the strong single currency is causing to the euro zone, David Bloom, global head of foreign exchange strategy at HSBC told CNBC Tuesday.
"They (the euro zone members) disagree about bonds, and which ones you should buy, and who's got the biggest covered bonds market, but there's one thing that they have in common… the euro," Bloom said.
"I think at some point the euro will strengthen and give them enough pain that they're all going to sit around the table and say, what shall we do?" Bloom added.
Last week, the European Central Bank announced a series of measures meant to increase liquidity in the euro system, such as extending the maturities of liquidity auctions and buying covered bonds, but ECB President Jean-Claude Trichet insisted this was not tantamount to quantitative easing.
When the euro will push below the pain threshold for the euro zone, higher than $1.50, the ECB will bring it down by printing it, Bloom said.
"You just manufacture it and sell it," he said. "I think as the euro pushes up quite aggressively, it's not impossible at some point that they threaten us with intervention."
The ECB's only mandate is to ensure inflation does not get out of control, unlike the Federal Reserve's mission to keep price stability while also looking after economic growth.
Despite this, the economic pain for the euro zone is likely to become too great to bear as a tight monetary policy exacerbates unemployment.
"I do believe they'll head for deflation, never mind inflation," Bloom said.
In the European Union, Britain, which is not in the euro zone, has embraced aggressive rate cuts and quantitative easing, pushing sterling to near parity with the euro. But this is where the euro has peaked against the pound, Bloom added.
"I don't expect sterling to weaken substantially from here. I think a lot of the bad news is in the market," he said.
- European Currencies Page