CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Please ensure you fully understand the risks involved. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Please ensure you fully understand the risks involved.

ECB’s dovish stance weighs on the euro

The ECB’s decision to end QE has not lifted the euro, and its cautious talk on interest rates puts further downward pressure on the currency. 

European Central Bank
Source: Bloomberg

The declaration of an end to quantitative easing (QE) purchases has not been the boon for the euro that might have been expected. Instead, the European Central Bank’s (ECB’s) determination to preserve its freedom of movement through a loose commitment to raise rates in the summer of 2019 has suggested that the dovish instinct remains strong.

Indeed, utterances from European central bankers since the recent ECB meeting have confirmed this dovish view. Ireland’s central bank governor, Philip Lane, has said that it is too soon to discuss the future rate hike path. While the data may improve in the next few months, it looks like the ECB is happy to stand still on monetary policy, preferring a ‘wait and see’ strategy for the time being.

Three things stand in the way of higher rates in the eurozone. Volatility across markets in the first few months of this year suggests that in the future we will have to expect further wild swings in financial assets, particularly equity markets, which are adjusting to the end of ultra-loose monetary policy and are also fearful of trade wars. Higher oil prices, which may not last due to the Organisation of the Petroleum Exporting Countries (OPEC) wavering on output levels, also keep the ECB from acting. Even if oil turns lower, this will remove one prop for higher inflation, removing one argument for higher rates.

Finally there is the problem of trade wars. It looks increasingly likely that the US and China will enter a full-blown trade conflict. One between the US and the EU may follow. This is the biggest risk to global growth, with Paul Krugman writing that the impact may equal 2%-3% of global gross domestic product (GDP). By comparison, the Great Recession wiped 6% off global GDP before recovering.

Taken together, these things are enough to justify the ECB’s cautious stance. But it means there may be little to prop up the euro, while Commitment of Traders reports continue to show a reduction in the record net long position from January.

EUR/USD is fighting hard to hold the $1.1554 area that represents key support. If this is broken, then $1.1125 would be a possible area of support. A recovery would suggest a move back to $1.1876, but the overall backdrop does not immediately suggest much upside is at hand.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.