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 Thursday 21 July 2016

PM Bulletin: The EURUSD and the ECB

 

 

Here’s a daily chart for the EURUSD:

PM Bulletin

What this first shows is how the euro suffered as the US dollar strengthened between the summer of 2014 (when the EURUSD was trading close to 1.4000) and March 2015. The EURUSD briefly broke below 1.0500 and all the talk was how the currency pair was heading for parity. The sell-off in the EURUSD began in mid-2014 as the US Federal Reserve began to taper its bond purchase programme and as speculation grew that the European Central Bank was preparing to launch its own version of Quantitative Easing. The Fed wound up its purchases in October 2014 while the ECB began its QE programme in March 2015.

The chart also shows how the single currency has struggled to recover ever since. Just under a year ago the EURUSD managed to break above 1.1700 – but it pulled back quickly amid the market carnage which came as the Chinese stock market went into melt-down and China devalued the yuan. The euro then managed another rally earlier this year following the so-called “Shanghai Accord.” This is where (according to some commentators) a secret agreement was struck at the G20 summit in Shanghai to weaken the US dollar and so take pressure off the Chinese yuan which is pegged to the greenback. But it appears that the UK’s Brexit vote has caused a rebasing of both the British pound and the single currency.

Fast forward to today and the aftermath of the ECB’s first rate setting meeting since the UK voted to leave the European Union. While the ECB kept all its interest rates unchanged along with its bond purchase programme, it signalled how it was prepared to loosen monetary policy further (should it be necessary) at its next meeting in September. At the same time, there’s been an uptick in market chatter suggesting that the Fed may be preparing the markets for a small rate hike in September. Taken together, these two prevailing forces should see the EURUSD head lower. That would suggest a break of near-term support around 1.1000 with the possibility of a retest of the March 2015 low.

EURUSD 4-hour chart:

PM Bulletin

But it’s also fair to say that investors are also wise to central bank jawboning. ECB President Mario Draghi made it clear today that he is concerned with the ongoing deflationary pressures across the Euro zone. But there also appears to be a significant faction within the central bank’s governing council that is pushing back against further monetary easing. At the same time, the Fed may want to keep the market guessing when it comes to tightening, but it is in no hurry to raise rates this year and potentially extinguish what is a tepid recovery at best. So, while it appears that the EURUSD has further to fall, the downside may be limited.

David: ECB President Mario Draghi made it clear today that he is concerned with the ongoing deflationary pressures across the Euro zone.

Disclaimer:

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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