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Currency Outlook: ECB Surprises the Markets

Alberto M.


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After the storm that Mario Draghi’s words last Thursday unleashed in the markets, all the previsions suggest this will be a quiet week. Finally, the European Central Bank decided to act and try to save Europe from deflation after the bad economic information that had been released in the previous weeks regarding the recovery of the Euro Zone.

The ECB made a bold move and cut down interest rates even further. The refinancing rate was decreased to +0.05% from +0.15% and the deposit rate to -0.2% from -0.1%. In addition, the ECB is beginning a bond and Asset Backed Securities (ABS) buying program next month. The details of this quantitative easing procedure designed to revive lending in the economy and support some banks won’t be revealed until October.

This host of measures has surprised the markets even after Draghi’s words at Jackson Hole last weekend suggested that the ECB was about to take measures. Nobody was expecting that the ECB acted so aggressively, and the decision shaped last week evolution of the foreign exchange market.

The Bank of Japan and the Bank of England also celebrated their Monetary Policy Making meetings last week, but they took no measures.

In the United States, the Non-Farm Payrolls release number was slightly lower than what was expected, and it weighted down the USD on Friday. However, U.S. economy is still in a growth trend.

From a geopolitical point of view, Ukraine – Russia conflict has faded from investors’ minds after the cease of fire, but the tension in the zone may continue to have its impact on the evolution of the Euro.

USD Outlook:

The USD boosted after the decision of ECB to cut rates, but the Non Farm Payrolls number was lower than expected. More information on U.S economic status will be released next Friday. In particular, the U.S. Advance Retail Sales and the University of Michigan’s consumer sentiment survey. Nothing seems to suggest that this won’t be another good week for USD.

EUR Outlook:

The Euro will continue reducing its strength with respect to the USD due the measures that the ECB has taken. Germany and France publish their Trade Balance this week, and the ECB releases its internal data next Thursday in their Monthly Bulletin. Althought it won’t have a comparable impact to Euro as last week decisions, it will reveal what make the ECB cut down rates and consider QE. The outlook for Euro this week is mediocre

GBP Outlook:

The most important event for the health of GBP is the speech by the Bank of England Governor, Mark Carney. According to the International Monetary Fund, United Kingdom growth is accelerating. Since the BoE policy regarding raising rates is based on employment indicators, and wages are not growing as expected, the markets will be paying attention to Carney`s word next Tuesday. However, the expectations are that this will be a good week for GBP.

JPY Outlook:

The Bank of Japan will issue the minutes from its policy meeting. The sales tax impact has already been hinted by the BoJ Governor Haruhiko Kuroda, but the central bank remains steadfast in maintaining their positive assessment of the economy. Kuroda will also speak on Friday at an event in Tokyo, but it won’t have an impact on the Japanese Yen mediocre performance this week.

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