Forex Markets Likely to Goad ECB into Action
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Forex Markets Likely to Goad ECB into Action

Mario Draghi, the president of the European Central Bank, is probably one of the most effective central bankers when it comes to talking the markets in a particular direction – but if he wants a weaker EUR, action will have to back his words.

Recently the ECB surprised forex markets with talk of unconventional monetary stimulus programmes including even quantitative easing to ward off possible deflationary pressures. Draghi and some other ECB members have since tied the prospect of monetary intervention to the EUR being too strong.

This had the intended effect of weakening the EUR. But such are the pressures for the EUR to rise, like the current account surplus, positive fund flows and very low inflation that talk will have to morph into action. And that action will probably have to happen fairly soon, even if it is not necessarily QE, which for some Eurozone policy makers remains controversial.

By Justin Pugsley, Markets Analyst MahiFX.  Follow @MahiFX on  twitter

EUR/USD – 1.40 level could trigger action

EURUSD daily chart in April 2014 foreign exchange trading euro dollar ECB effects

Studying the options

ECB concerns over the strength of the EUR appear to be mainly focused on the fact that it is helping to create deflationary pressures in the Eurozone – rather than just hurting exports. Usually the primary concern for policy makers these days.

The ECB would probably prefer to wait for at least several more months of inflation data before deciding how to act or if it is even necessary. But the currency markets, forever trying to discount future news flow, are likely to try and push the EUR higher in turn creating a dilemma for the ECB.

The ECB could resort to direct intervention in the forex markets, such as simply selling EURs to drive down the exchange rate while it decides whether or not the Eurozone has a deflation problem. It’s a crude measure and if executed well can be effective for a short while, but fundamentals usually reassert themselves.

More subtle measures, and possibly more effective longer-term, could include cutting interest rates, even going for negative rates and looking at ways to push more money into the banking sector and most importantly from the ECB’s point of view the private sector. That would help stimulate investment and consumption.

The problem for the Eurozone remains a lack of domestic demand – hence the deflationary pressures and the rising current account surplus. Get the Eurozone consuming more and that could begin to address the ECB’s concerns over falling prices and push CPI back up to around the 2% target.

Further reading:  Will the ECB ever really do QE?

Justin Pugsley

Justin Pugsley

MahiFX is headed by David Cooney, former global co-head of currency options and e-FX trading at Barclays Capital and responsible for the award winning e-commerce platform BARX and Susan Cooney, former head of e-FX Institutional Sales in Europe for Barclays Capital. Operating as a market maker, MahiFX provides traders direct access to institutional level execution speeds and spreads through its proprietary-built fully automated pricing and risk management technology, lowering the cost of retail forex trading. MahiFX global operations are headquartered in Christchurch, New Zealand with offices in London, UK with development and support teams in both locations for 24 hour service. The company is regulated by The Australian Securities and Investments Commission (ASIC), Australia’s corporate, markets and financial services regulator. Article by Justin Pugsley, Markets Analyst MahiFX  Follow MahiFX on twitter and on facebook  Disclaimer: This material is considered a public relations communication for general information purposes and does not contain, and should not be construed as containing, investment advice or an investment recommendation, or an offer of or solicitation for any transactions in financial instruments. MahiFX makes no representation and assumes no liability as to the accuracy or completeness of the information provided. The use of MahiFX’s services must be based on your own research and advice, and no reliance should be placed on any information provided or comment made by any director, officer or employee of MahiFX. Any opinions expressed may be personal to the author, and may not reflect the opinions of MahiFX, and are subject to change without notice