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 Tuesday 06 September 2016

PM Bulletin: EURUSD – still range bound

 

 

Between June 2014 and March 2015 the EURUSD fell around 25%. This was a stunning move which saw the pair fall from just below 1.4000 to 1.0500. Back then all the talk was about how soon the EURUSD would hit parity.

The main reason for the move was the divergence in central bank monetary policy. Back in the summer of 2014 the US Federal Reserve was winding down its monthly bond purchase programme – something which finally came to an end in October that year. Meanwhile, the European Central Bank (ECB) was designing its own version of quantitative easing. In March 2015 the ECB began buying €60 billion of eligible bonds per month in a programme initially set to terminate this month. However, the programme has since been expanded in both size and duration. The ECB is now buying up €80 billion of bonds per month and the programme is currently set to run until March 2017.

Despite this, inflation expectations for the Euro zone remain tepid while the latest update for second quarter GDP showed growth of just 0.3% quarter-on-quarter. This has led a number of analysts to predict that the ECB’s Governing Council will look to boost its monetary stimulus programme further when it meets on Wednesday and Thursday this week. This could mean once again extending the size and duration of the programme. It could also mean that the ECB cuts its Deposit Rate further into negative territory. Some analysts believe that it may shave another 10 basis points off the rate taking it to -0.50%.

At the same time the US Federal Reserve is expected to tighten monetary policy before the year-end. The chances of a September rate hike are still pretty low – no matter what Fed chiefs Janet Yellen and Stanley Fischer would like us to believe. But the market is still pricing in an increase of at least 25 basis points on the fed funds rate at the December meeting.

Yet the EURUSD remains stuck in a relatively narrow trading range. In fact, it was only Janet Yellen’s hawkish Jackson Hole speech which has seen the dollar rally off the lower end of the range (the EURUSD pull back from the 1.1400 area). So it could be argued that as far as the FX market is concerned, traders expect more of the same. That is, central bankers will continue to jawbone away while holding off from taking further action. After all, there is very little evidence that the past eight years of monetary stimulus have brought much in the way of economic growth, or sparked inflation. At the same time, the US Federal Reserve seems terrified of spooking the equity and bond markets with a second rate hike in less than a year.

pm06.09


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Spread Co is an execution only service provider. The material on this page is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by Spread Co Ltd or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

 

Posted by David Morrison

Tagged: Bulletin PM

Category: PM Bulletin


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