Quantitative Easing

Despite recent geopolitical risks in Europe posing potential threats to the euro, the common currency has managed to remain relatively resilient against its major counterparts, including the US dollar and Japanese yen. Most recently, a tense stalemate between Spain’s central government and the Catalonia region’s independence movement has also failed thus far in making any substantially negative impact on the euro.

As usual, Thursday’s European Central Bank (ECB) policy decision and press conference will be watched closely for clues regarding the bank’s current stance on monetary policy, including its views on Eurozone inflation, interest rates, and potential tapering of the ECB’s massive quantitative easing (QE) program. Of primary concern for euro traders will be whether or not a timeline for QE tapering will be addressed, as well as whether ECB President Mario Draghi will verbally attempt to stem the strength of the euro. Last month, minutes from July’s ECB meeting unveiled concerns about the possibility of the euro “overshooting.”

This week is undeniably a busy one with four major central bank meetings, including the heavily anticipated FOMC on Wednesday and the Bank of Japan on Thursday.

EUR/USD pulled back on Monday after having rebounded sharply above the key 1.0500 support level last week.

A flurry of major central bank activity has dominated the markets in recent weeks as we approach the end of a roller-coaster year for the markets. This barrage of December policy decisions began last week with the Reserve Bank of Australia (RBA), Bank of Canada (BoC), and European Central Bank (ECB). The roster continued this past week with the US Federal Reserve, Swiss National Bank (SNB), and Bank of England (BoE). Finally, next week will round out the major central bank decisions of December and of the entire year with the Bank of Japan’s critical policy meeting early in the week.

EUR/GBP has been falling sharply since early November as the pound has gained back some traction after hitting Brexit-driven, multi-decade lows against the US dollar in October. At the same time, the euro has been weighed down by continuing economic worries in Europe and a consistently dovish European Central Bank (ECB).

This past week launched December’s lineup of major central bank decisions with relatively uneventful statements by the Reserve Bank of Australia (RBA) and Bank of Canada (BoC), both of which kept interest rates unchanged. The RBA left its cash rate at the record low 1.50%, after having cut by 25 basis points back in July. The BoC also kept steady, leaving its overnight rate at 0.50% as it has remained for nearly a year and a half. Both central banks cited global economic growth as a key factor in their decisions to refrain from cutting interest rates further. These expected policy outcomes were naturally not very market-moving, but they were followed on Thursday by the European Central Bank (ECB), which provided significantly more currency volatility.

The European Central Bank (ECB) issued a somewhat surprising but rather mixed message on Thursday that led to a bit of a tailspin for the euro which quickly transformed into a steep dive for EUR/USD.

The resounding “no” that resulted from Italy’s referendum on constitutional reform over the weekend placed the future of the euro firmly in the spotlight, yet failed to weigh on the common currency in the immediate aftermath. The euro rebounded powerfully from its new lows against the dollar just a day after the vote, defying any concerns over the referendum’s potential financial and economic implications. However, the new post-Renzi (Italy’s outgoing PM Matteo Renzi) order is only just beginning, and concerns for the euro have the strong potential to multiply as Italy’s political turmoil deepens. But perhaps even more pressing for the euro at the moment will be the European Central Bank’s (ECB) policy decision on Thursday.

With new polling indicating that Hillary Clinton’s lead over Donald Trump in the US presidential race has widened to double digits in the wake of last week’s debate and other controversies, markets have increasingly come to expect the likely prospect of a Clinton victory. However, the 2016 presidential campaign still has slightly more than two weeks to go, and an upset by the defiant Republican candidate remains a possibility, though currently rather slim. Markets have been pushed and pulled for weeks on speculation over the election, as well as other key events and conditions like company earnings season, fluctuations in energy prices, and the upcoming November/December Federal Reserve meetings. For the currency markets, though, central bank outlooks remain front and center.

As the US dollar generally remained resilient on Tuesday after having pulled back on Monday, EUR/USD fell back towards major support around the 1.0950 level.

Markets have made some significant swings recently as several current and near-future risk conditions have heavily impacted investor sentiment. Going forward, the next few weeks promise to be rife with potential risk and uncertainty that could move markets substantially, particularly with respect to the euro, the US dollar, and gold.

EUR/USD made a major breakdown on Tuesday as the US dollar surged on increasingly higher expectations of a Federal Reserve interest rate hike before year-end as well as increasingly lower prospects for a victory by Donald Trump in the early November US presidential elections. At the same time that the dollar has been boosted, the euro showed some pronounced weakness on Tuesday, falling not only against the dollar, but also against the yen, while rising against the even more pressured British pound.