ECB Could Drive EUR Lower Next Week

The euro started 2015 with another downward lurch, hitting a 4-1/2 year low against the dollar on clear indications that the European Central Bank will soon embark on outright money-printing.

Yields on government bonds issued by the euro zone’s heavily indebted southern member states – which the bank would be expected to buy in any such campaign of quantitative easing – also fell on Friday after ECB President Mario Draghi said the risk of it falling short of its mandate on inflation targeting had risen compared to six months ago.

Stock markets in Europe turned lower after initial gains, driven by a downward revision of purchasing manager surveys for France and the euro zone as a whole. The pan-European FTSEurofirst 300 index .FTEU3 fell 0.3 percent.

Wall Street’s main indexesDJc1 SPc1, however, were set to open higher, while the dollar hit a nine-year peak against a basket of major currencies .DXY.

The divergence expected between European and U.S. monetary policy in 2015 dominated currency markets’ thinking last year, and Draghi’s signal that the ECB was preparing for more action added to expectations that it will step in soon.

“The risk is on the downside for the euro after these comments,” said Niels Christensen, an FX strategist at Nordea in Copenhagen.

“It could break below $1.20 since there is a risk of a very low inflation reading out of the euro zone next week. That will just add to pressure on the ECB to take measures when it meets later this month.”

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