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.
* 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.
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments.
He has a deep understanding of market fundamentals and the impact of global events on capital markets.
He is respected among professional traders for his skilled analysis and career history as global head
of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean
has played an instrumental role in driving awareness of the forex market as an emerging asset class
for retail investors, as well as providing expert counsel to a number of internal teams on how to best
serve clients and industry stakeholders.