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This week’s European Central Banks (ECB) meeting will come at a time when the bank is clearly concerned about the steady rise in the value of the euro. The bank faces a problem as, although economic growth is improving, the rise in the currency has hit inflation, pushing it lower and further away from the bank’s target. But more reduction in the monthly asset purchase scheme, a ‘tapering of quantitative easing (QE)’ in technical parlance, will likely cause the euro to rise further, putting more pressure on inflation. And thus the cycle goes on.
It seems unlikely that the ECB will make a major announcement at this meeting on the next change to the path of the QE programme. Recent reports suggested that we may have to wait until December, although this may be an exaggeration.
Except some commitment to actually boost the QE programme, it seems there is little that the ECB can really do to stop euro appreciation. After all, economic growth continues, which makes eurozone stocks attractive. And to buy eurozone stocks, you need to buy euros first.
A higher euro would likely mean that the major eurozone indices will continue to suffer, keeping the downtrend that has persisted since June. For now, it seems difficult to see any means by which the ECB can arrest the euro’s rise, as at some point the bank will want to cut back the monthly asset purchase programme further. But for the moment, it may not have much choice but to carry on as before, in a bid to boost inflation.
Their best hope may be a shift in sentiment, with a more hawkish Federal Reserve or a resolution of the US debt ceiling crisis boosting the dollar and weakening the euro.