A Slew of New QE From the ECB (Many Problems on Their Hands)

What the ECB is fighting and how the Euro is effected

ECB Flag
European Central Bank Flag Flies in Germany.

Many central banks and economies that were hoping to get a lift from a rate rise out of the Federal Reserve will have to continue waiting. Ideally, a stronger dollar would be at the expense of their currency, which would weaken the currency and make it easier for exports to help lift the struggling economy.

The pass by the Fed has served to encourage volatile markets, which recently has seen the euro and yen strengthened due to their account surpluses.

Unfortunately, a strong currency is counter to their wishes, which may help add to the case for the next round of quantitative easing or QE. Recently, Vítor Constâncio, Vice-President of the ECB has noted that the European Central Bank can expand their quantitative easing if needed in many signs point that it is needed.

Inflation And Economic Growth In Focus

Global economic risks are weighing on major economies have engaged in quantitative easing over the last year or longer. Janet Yellen noted the Federal Reserve is monitoring developments abroad, which ECB Executive Board member Benoit Coeure said aligned with the ECB’s view that global risks are increasing in the €1.1 trillion quantitative easing program may soon be expanded to help inflation and economic growth.

Much of inflation is tied to commodities and global economic growth, which has recently printed well below forecasts and downright discouraging.

Earlier this year, many investment banks and economists were thinking parity, before exchange turn for currencies equaling one another or 1.00, was a foregone conclusion after the ECB first launched their 1.1 trillion QE program back in January. However, a relative dovish Federal Reserve statement from Janet Yellen in mid-March caused the euro to rise from 1.04602 to 1.1715 over the span of March to late August.

The strengthening euro made it difficult for exports out of the euro zone, which dampened the growth all the while broader measures brought down inflation readings.

This combination has caused many to believe that the fourth quarter of 2015 could see the European Central Bank and the Bank of Japan boosting monetary stimulus to get inflation higher along with economic growth. In the near term, it appears that the dovish Federal Reserve has the potential to prevent the dollar from strengthening too much which could allow EURUSD to move higher further complicating the path for the ECB to get their goals of growth and inflation.

It was recently noted, from the speculative point of view that EUR shorts were at their lowest levels for the year. The light positioning has been blamed in part on the summer lull as well as China turmoil increasing overall uncertainty and market liquidity. However, this means more volatility could arise if that number grows as well on further ECB comments or speculation of further easing.

Major factors

In an interview with NZZ newspaper, ECB Executive Board member Peter Praet noted last week that the European Central Bank should stand ready to act if the economic shocks that cause the Federal Reserve to not hike or long-lasting. As you can imagine, the reasons for low oil as many as they are have not found a way to fix themselves in an efficient manner. Additionally the pain found in emerging economies, seem to be a long unwind of something that took many years to develop and also will likely not resolve itself soon.

Because these major factors are likely long-lasting, it’s likely that we could see increased stimulus from the European Central Bank later this year that could continue to Strength in the EUR from developing longer-term.

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