Week in FX Europe – Dollar Perception Has the EUR Appreciating
Quantitative Easing or QE has been the main driver of exchange rates and it will probably remain this way for some time. The change in the balance sheet values of the ECB and the Fed has had an extreme effect on the value of the ‘single’ currency. More importantly, the Fed and ECB actions over the past week points towards a continuation of this EUR strength.
When the Fed gets to add liquidity via QE, it expands it’s own balance sheet in relation to that of the ECB’s, hence the spread between the two entities grows. Historically, the dollar begins to slide. When the ECB does it, the spread narrows and the EUR is now on that slippery slope.
Confidence in the European banking system has also been boosted in recent weeks, as some European banks agree to payback their three-year LTRO loans two-year’s early to the ECB. This will help to reduce the debt on the central banks balance sheet and give the EUR a boost.
This balance sheet scenario suggests that the EUR would appreciate outright; at least until investors perceive that the Fed will stop expanding its own balance sheet.
Next week the ECB is expected to keep rates on hold at its February meeting. The EUR’s value could be putting Draghi in a position to suggest that some central bank measures may be required over the coming months.
|
 |
 |
|
WEEK AHEAD
* AUD Reserve Bank of Australia Rate Decision
* EUR Euro-Zone Retail Sales
* AUD Unemployment Rate
* GBP Bank of England Rate Decision
* GBP BOE Asset Purchase Target
* EUR European Central Bank Rate Decision
* CNY Consumer Price Index
* EUR German Consumer Price Index
* CAD Unemployment Rate
This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.
