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11 Feb 2016
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10 Feb 2016
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10 Feb 2016
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09 Feb 2016
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09 Feb 2016
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08 Feb 2016
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08 Feb 2016
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05 Feb 2016
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04 Feb 2016
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04 Feb 2016
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 Tuesday 02 February 2016

PM Bulletin: A look at the EURUSD

 

 




The decline in the EURUSD began in mid-2014 when the US Federal Reserve first intimated that it was looking to dial back on its programme of monthly bond purchases. This was its third iteration of quantitative easing (QE) which finally came to an end in October that year. The EURUSD continued to fall (and the US dollar rise) due to the obvious divergence in monetary policy between the Fed and the European Central Bank (ECB). In early 2015 all the talk was about not only when the US central bank would begin raising interest rates, but also when the ECB would undertake its own version of QE. The former process took the best part of a year to happen while the ECB began its own €60 per month bond purchase programme in January 2015.

Back then most of the speculation concerning the currency pair was about when it was going to hit parity. In March 2015 the EURUSD traded below 1.0500 for the first time since January 2003. But the US dollar then weakened until the third quarter of 2015 (ignoring the China-inspired summer tumult) as the Federal Reserve repeatedly ducked out from raising rates. The greenback then began to strengthen again on talk of additional ECB stimulus and as a December Fed rate hike looked inevitable.

Well now we’ve had both. On 3rd December the ECB extended the duration of its bond purchase programme. Yet despite this the dollar first weakened appreciably as the ECB stimulus fell short of expectations. Two weeks later the Fed finally announced a 25 basis point rate hike with the prospect of another four similar hikes in 2016.

Mario Draghi has now effectively promised to provide further stimulus at the next central bank meeting in March. Meanwhile, it looks as if the Fed made a major error in tightening back in December. They won’t want to backtrack and cut so soon after hiking for the first time in nearly ten years, but they’ll probably dial back their projections for rate rises for the rest of this year. So this should undermine the dollar going forward. And we’ll have to wait until March before we hear if the ECB is going to come good on its promise for yet more stimuli. So we could find that the EURUSD ranges between 1.0800 and 1.1000 for the rest of the month. But we’ll need to keep a close eye on that upper level in case there’s a breakout. Much will depend on what members of the Fed and ECB say over the coming weeks.  One thing is for sure, there’s now surprisingly little talk of EURUSD parity.





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Posted by David Morrison

Tagged: Bulletin PM

Category: PM Bulletin


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