Forex Trading: ECB Policy Could Weigh on Euro
Currencies / Forex Trading Sep 27, 2016 - 12:49 PM GMTBy: Submissions
easyMarkets writes: When the European Central Bank (ECB) held its monetary policy meeting on September 8th , it left all policy rates unchanged. The main refinancing interest rate, the marginal lending facility rate and the main deposit interest rate were kept steady at the current levels of 0.00%, 0.25%, and negative 0.40%, respectively. This will likely have a long-term impact on forex traders that have exposure in the EUR/USD as it ultimately indicates lower price valuations in the weeks and months ahead.
As this occurred, the bank also maintained its accommodative monetary stance by confirming that it expects rates to remain at current (or even lower) levels for an extended period of time. The Governing Council confirmed that monthly asset purchases of €80 billion will continue until the end of March 2017, so this is the type of time horizons that EUR/USD traders should be watching.
ECB Policy Intentions
Although it did not declare an extension of the bond buying programme till September 2017 (as was widely expected), the ECB clearly displayed such intentions. The council said that they will continue asset purchases beyond March 2017, if deemed necessary, until a sustainable improvement is observed in inflation. The ECB probably wanted to take into consideration the actions of US Federal Reserve and Bank of Japan -- whose monetary policy meetings were held later in the same month (and before announcing any major programme).
It has to be noted that Europe is facing an ongoing problem of low growth and low inflation, and it is likely that these factors will keep the Euro under pressure for the rest of this year. Growth remained tepid at 0.3% in Q2-2016, while inflation hovered at just 0.2% in August. This is far below the ECB target in achieving inflation of 2% -- and this seems to be a distant dream at least for now. The inflation record has remained low for a long time, and the ECB’s massive quantitative easing approach doesn’t seem to have much impact on improving the same.
Lingering Problems
There are further problems, which the ECB has to tackle and this does not exclude the impact of Brexit on Eurozone growth. The full effect is not yet clear and no one knows how it will turn out over the next few quarters. There are also technical issues in extending its asset purchase programme, and this could created added volatility in the EUR/USD.
The ECB has restrictions on the quantity and type of bonds it can buy. It cannot buy in excess of 1/3rd of any individual bond issue. Similarly, it cannot buy bonds yielding less than -0.4%. To compound the problems further, there are shortages in popular bond markets (such as the German government bonds). So, either, the ECB has to change its rules and start buying more bonds yielding negative interest rates or in the extreme case it has to start buying other assets such as stocks and corporate bonds(similar to what Bank of Japan has been doing).
Looking Ahead
The next ECB monetary meetings are scheduled on October 20th and December 8th. It will be interesting to see what path ECB adopts especially after the ‘no-change’ policy of US Fed and Bank of Japan (which we saw on the 21st of September). The outcome here will almost certainly raise volatility levels for forex traders with active exposure in currency pairs like the EUR/USD and the EUR/JPY.
By easyMarkets
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