Friday September 13, 2019 - 13:04:36 GMT
Share This Story
Global-View.com - www.global-view.com
Forex View: Currency Wars - Did ECB Stimulus Backfire?
In an era of low inflation, the easiest way to provide stimulus to an economy is by weakening one’s currency. Some call it a currency war or competitive devaluation, a term that central bankers and finance officials will deny as policy but in private probably welcome a weaker currency.
This was the focus on Thursday when the ECB announced a widely expected stimulus package, which included a resumption of the asset purchase program of EUR20 bln per month (at the low end of expectations) with an open ended duration (a surorise) despite reported strong opposition from several board members.
This saw the EURUSD initially fall sharply but then reverse course after holding the recent 1.0925 low (see chart below) to trade to 1.1087 later in the day. It has so far extended its high to 1.1109 on Friday. For a currency averaging a daily range of 58 pips over the past month the 161 pip range post-ECB was a big swing in volatility. Similar price action was seen in bonds with 10-year German bund yields initially slipping further into negative territory at -0.65% to only reverse course and close the day just above -0.50%.
Source IG US: Test out this broker for lower spreads and excellent customer service.
So if the intention was to weaken the EUR the strategy, at least for now, has backfired. While the EURUSD whipsaw rebound has held off the downside for now the price action is still corrective although it has chatter in the market calling for a risk shifting to the upside. To trigger further momentum the 1.1164 level would have to be taken out. This should have ECB members scratching their collective heads as stronger stimulus would likely have come from a weakening of its currency than monetary measures announced on Thursday.
To sum up, if one intention of the Draghi led ECB was to weaken the EUR, the strategy has so far had the opposite effect despite fundamentals that call for a weak currency. This should have President Trump cheering for now as it takes the focus off the question at what level might the U.S. look to intervene to join the currency war and try to weaken the dollar.
Jay Meisler, founder
Forex Trading News
Daily Forex Market News
Forex news reports can be found on the forex research
headlines page below. Here you will find real-time forex market news reports
provided by respected contributors of currency trading information. Daily forex
market news, weekly forex research and monthly forex news features can be found
Real-time forex market news reports and features providing
other currency trading information can be accessed by clicking on any of the
headlines below. At the top of the forex blog page you will find the latest
forex trading information. Scroll down the page if you are looking for less
recent currency trading information. Scroll to the bottom of fx blog headlines
and click on the link for past reports on forex. Currency world news reports
from previous years can be found on the left sidebar under "FX Archives."