Which Way Will The Euro Go?

25 October, 2017

ECB Monetary Policy – Which Way Will The Euro Go?


This week’s most significant event is of course the ECB monetary policy meeting. In the past few months we have definitely seen central banks around the world hold a hawkish stance regarding monetary policy. Although the signs of growth are plentiful, it seems that global central bankers are weary that a tightening of monetary policy could result in inflation outpacing salary growth – stifling an economy barely coming out of a decade long crisis.

Although signs of a healthy economy are multitudinous, politically the EU hasn’t had its best year (or has depending on how you see it) – hard Brexit negotiations could stop a profitable and beneficial (for both parties invovled) trade agreement. The political instability it created has already raised questions regarding the integrity of the union itself.

Beyond that the French elections made EUR traders antsy, since the presidential race was between a Pro-EU, pro-growth and ex-Ministry of Economics Macron and a Euro-skeptic, far right and anti-immigration Le Pen. More recently Germany had its own far-right situation, with significantly worse results – the AfD the first far-right party to enter the Bundestag since WWII – managed to muster up a significant 12.6% making it the third most represented party in the German parliament.

Currently the Eurozone’s interest rates are well under the target of 2%. Although the ECB’s officials have gone on record saying that they are seeing inflation recovery and expecting it to reach their targets, they still believe that monetary stimulus is still necessary at the moment.

The officials aren’t wrong either, even considering the on-going Brexit negotiations, data is showing a preservation of the Union’s economic momentum. Growth has been stable and the last ZEW Surveys showed that outlook is optimistic even if it fell slightly in the past four months. With the political issues in the US and the hard Brexit negotiations in the UK, the EUR has been left more or less without a major currency competitor.

Draghi also went on record saying he believed that monetary policy should stay loose until the end of the year, to avoid putting unnecessary pressure on an economy that has just started recovering. No matter what happens on the 26th of this month, markets will inevitably be watching and listening Draghi’s press conference after the meeting closely for any hints regarding monetary policy and the potential for an interest rate hike.  


Sources:

https://www.bloomberg.com/news/articles/2017-10-23/asian-stocks-to-track-u-s-declines-vix-jumps-markets-wrap

http://www.cityam.com/271572/european-central-bank-holds-monetary-policy-steady

https://www.cnbc.com/2017/09/07/ecb-rate-decision-traders-eye-draghi-comments.html

https://www.bloomberg.com/news/articles/2017-10-23/asian-stocks-to-track-u-s-declines-vix-jumps-markets-wrap


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