EUR/USD Heading Back Down after Draghi

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As of last month, the European Central Bank (ECB) left its monetary policy unchanged in December, leaving its refinancing rate at 0%, marginal interest rate at 0.25%, and its deposit rate at -0.4%. The ECB also declared that monthly asset purchases should be in place until at least December 2017 (revised from March 2017), or longer if necessary. That’s about 540 billion of additional liquidity in the euro zone economies.

What’s also changed is the reduced monthly amount, to start in April 2017: the buying program won’t be 80 billion euros, but 60 billion. A good sum-up has been made by Bloomberg: “Mario Draghi’s message to investors on the future of his quantitative-easing program on Thursday could have been boiled down to three words: less is more.”

Changes to quantitative easing program

Market participants were first undecided about the changes to the QE program, but they seemed to have appreciated the news in the end.

Investor expectations were high after the “no” victory of Italy’s constitutional referendum at the beginning of the week, as they expected that the ECB will be very accommodative in order to avoid systemic risk from spreading from the very weak Italian banking sector.

Mario Draghi insisted on the fact that those decisions are not describing a “tapering situation” – a gradual reduction of the quantitative easing policy, as it hasn’t been discussed during the meeting.

Once at 60 billion euros a month, the ECB said it would be prepared to increase the monthly asset purchase program again if financial and banking conditions start deteriorating.

EUR/USD heading back down

The euro, which was rather bullish against the US dollar before the ECB meeting, has since weakened upon the publication of the press release. Mario Draghi might have succeeded in convincing market participants that it’s not a “tapering” after all – as they expect the ECB to continue its accommodative monetary policy after December 2017.

The difference between the American and the European monetary policies haven’t been as strong in quite some time. Indeed, the greenback is supported by the prospect of a December interest rate hike, which has been fully priced in by market participants. The FED is also expected to continue its tightening cycle next year.

At the beginning of the month, the American dollar stabilised after 10 consecutive bullish sessions, which is its longest winning streak in 4 years, and also after reaching its highest level in almost 14 years. Donald Trump’s election has also given investors the confidence needed to invest more into America, as they can see that his expansionary economic policies, plans for major infrastructure spending and tax cuts will be important measures that could increase US growth and further support the American dollar.

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