24 July 2014

Lower EURUSD buys Draghi more time

EURUSD falls below 1.3500 for first time since January as European Central Bank builds case for further easing

​​​​​​What impact will the ECB's targeted long term refinancing operation have on the Eurozone?

After EUR/USD hit highs of above 1.3900 in both March and May this year, jawboning of the single currency by the European Central Bank (ECB) president, Mario Draghi, was backed up with policy measures introduced on June 5th. The most notable of these was the reduction in the base interest rate across the continent to 0.15%, whilst it was also the first time that negative deposit rates have been used. Designed not only to encourage bank lending and spending across the Eurozone, there is also a clear intention by the ECB to keep the EUR/USD exchange rate low. Talk of the pair hitting the 1.4000 mark clearly made the central bank’s Governing Council uneasy, and now it seems like those policy measures in relation to the exchange rate have had their desired effect. The quantitative easing tool was not introduced by the ECB in June although the door was left open to this possibility. It remains to be seen whether the targeted longer term refinancing operation, or TLTRO, will spur some momentum within the space of the smaller businesses crying out for credit. The ECB has time at the moment to determine whether bank lending to smaller businesses will improve, but the clock is ticking on this part as well as the other aspects of the new policy implementations. In any case, after a period of relative stagnation around the 1.3600 level, the exchange rate has fallen below the 1.3500 mark for the first time since January.

What this means for traders

Trading currently at 1.3470 (14:40 BST), the drop in EUR/USD which occurred yesterday was largely due to the hawkish Bundesbank head, Jens Weidmann, warning that an extended period of low inflation could be dangerous for the economy as a whole. Despite largely better than expected flash PMIs released in Europe this morning, EUR/USD cannot gain the strength to trade above this key 1.3500 level. With the prospect of the base interest rate in the US rising in the not too distant future, and signs that the economy there is on the right track, the level of the most traded currency pair in the world may well continue to shy away from any long-term upward trend.

How will the Euro trade against the US dollar?

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The value of your investments can go down as well as up.
Losses can exceed deposits on margin products. Please ensure you understand the risks.