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EUR/USD is at levels last seen in December 2014, but Martin Arnold, of EFX Securities, expects it could fall to $1.18 as the European Central Bank (ECB) will not be as hawkish as the market expects. The latest ECB monetary policy meeting is on 25 January 2018.
Find out more on why the ECB meetings are important to traders.
Quiet growth for eurozone
The euro has climbed over the past three years because the underlying economic fundamentals of the eurozone have significantly improved. There have been no big crises and the political scene across the bloc has been more stable, he said.
This is in contrast to July 2012 when bond yields of so-called periphery eurozone members were soaring and bailouts to debt-laden members were threating the currency union. In response, president of the ECB, Mario Draghi, said at the time it was ‘ready to do whatever it takes to preserve the euro’.
ECB concern over EUR/USD
In 2017, Arnold said expectations of a return of inflation led to the belief that the ECB would respond aggressively, by raising rates and tapering quantitative easing (QE). He expects ECB’s cautious approach of 2017 to continue, as it is getting concerned with the euro at $1.23.
If the ECB is not as aggressive at reducing the money supply as the market is thinking, there could be some significant downside for the euro against dollar. As the euro gets more expensive, foreign corporates will be less likely to issue bonds in euros, he added. Draghi’s press conference after the ECB meeting may give further clarification of the central bank’s stance.
Investors are getting ahead of themselves on the EUR/USD, especially looking at the differential between real interest rates on eurozone and US ten-year bonds. The ECB has halved the amount of bonds it is buying every month but the balance sheet could continue to rise after the September 2018 deadline.
