Dollar Weakens Against Euro But Off Lows



EUR/USD – Euro Slides as ECB Extends QE to December 2017

December 9, 2016

(Market Pulse) The euro has taken a pause on Friday, following sharp losses in the Thursday session. EUR/USD dropped 1.3% after the European Central Bank (ECB) announced that it was extending its asset-purchase program until December 2017. Currently EUR/USD is trading just above the 1.06 line. On the release front, Germany’s trade surplus fell to EUR 20.5 billion, short of the forecast of 20.8 billion. In the US, today’s key event is University of Michigan Consumer Sentiment, with the index expected to jump to 94.3 points.

As expected, the ECB kept interest rates at a record low 0.00%. The bank has shown a ‘hands off’ policy, leaving rates unchanged since January. However, the ECB did make a major move with its quantitative easing program (QE). The program, which was due to terminate in March 2017, has been extended until December 2017. As well, the monthly purchases of EUR 80 billion will be cut to EUR 60 billion in April.

ECB President Mario Draghi said that reducing current purchases did not amount to tapering, but the markets weren’t buying his argument. The bold move to cut purchases can be supported the fact that the Eurozone economy has shown improvement in the latter half of 2016, and inflation and growth projections for the Eurozone have been revised upwards. Still, there are rough waters ahead for the Eurozone, which must deal with the fallout of the Italian referendum as well as upcoming negotiations with Britain ahead of its withdrawal from the European Union.

The Federal Reserve will once again be on center stage next week as the Fed meets for its monthly policy meeting. This will be the first meeting after Donald Trump’s election as president. More importantly of course, the markets have priced in a rate hike at 95 percent, most likely a quarter-point increase. This would mark the first hike by the Fed since last December, and anticipation of a hike has translated into strong gains for the greenback.

It will be interesting to see what happens early next year, with the Trump administration taking over in Washington. Trump has stated that he plans to increase government spending and cut taxes, which could lead to higher inflation levels. The Fed has indicated that it plans to raise rates gradually in 2017, but this could change once the new administration’s economic policies become clearer.

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