Only ECB Stands in the Way of Further EUR Strength

Many of the factors driving the euro exchange rate to levels that have set off alarm bells at the European Central Bank are unlikely to go away on their own, part of the reason the bank has been threatening action.

The euro is still off the peaks of 2011, but because inflation is now heading close to zero, the ECB is sensitive to its current rate because anything that makes it stronger pushes deflation nearer.

Mario Draghi, the ECB president, said at the weekend a strengthening exchange rate would trigger more policy action.

That could be some form of quantitative easing, or asset buying, to get more money into the system and hence make the euro cheaper.

Indeed, one reason for the euro’s relative strength is that central banks in the United States and Japan have been printing dollars and yen for such bond-buying programs, while the ECB’s euro balance sheet has been shrinking.

via Reuters

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza