The ECB undermined the euro

November 26, 2015

On Thursday afternoon, the main currency pair remained under pressure due to yesterday's news about the readiness of the regulator to extend QE. The single European currency on Thursday afternoon is still in a weak position, as investors continue to analyze the information obtained yesterday. Current quote in the EUR/USD is 1.0607. Yesterday the instrument touched the local "bottom" at the level of 1.0565.

The reason for the deterioration in market sentiment was information from Reuters, under which the European Central Bank is considering the possibility of expanding the program to stimulate the region's economy QE and at the same time, the introduction of a two-stage commission fees for banking organizations. This will be true for those market participants that are ECB deposits - that is, virtually all of the key banks in the Old World.

There is nothing new in the projections regarding the increase in the volume of QE. Since March 2015, the regulator buys bonds monthly in the volume of 60 billion euro. The expansion program is necessary for the economy, as inflation can not be restarted in the current settings.

As to the mechanism of two-stage collection with banks, this lever could operate as follows. The banks are already paying the ECB for the opportunity to store their funds on its deposits (deposit rate long-negative), and now the regulator will be able to earn extra money and will likely stimulate the part of the banks to withdraw money from deposits (finally) - and let it out for lending to the real sector.

Any reference to easing in the monetary conditions in the euro area naturally plays against the euro, especially in the light of the December Fed meeting, which is expected to increase rates.

The ECB meeting will be held before the meeting of the Fed - as early as next week, on December 3rd.
 
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