Short-term EUR/USD traders would have hoped for more from Wednesday’s news and data releases. Investors learned on the day that the Federal Reserve are planning to shrink their balance sheet (akin to monetary tightening) and that a strong employment trend persists in the world’s largest economy (US ADP employment +263k vs. +184k expected). Nevertheless, the euro-to-US dollar exchange rate did yesterday what it did on both Monday and Tuesday of this week, which is to finish the day very close to where it began and to offer little in terms of intra-day volatility.
Those with longer-term interests in buying euros are presented with some important developments, however.
Less QE and Reduced Political Risk Might Drive the Euro Higher in 2017
The euro is historically cheap against the US dollar and many other currencies. Today, a single euro costs only USD 1.06, which is the same as it cost in March 2003. In 2014, a euro cost USD 1.40, and in 2008 it cost as much as USD 1.60. Against the Singapore dollar, for example, one euro today costs only SGD 1.49, but in 2008 it would have cost as much as SGD 2.20.
Following the 2008/09 financial crisis the single currency has been managed in a way that has driven its price down. Policymakers in Europe implemented balance sheet expansion, or ‘quantitative easing’ (QE), to facilitate extremely loose monetary policy, above and beyond what was achievable by simply setting the national interest rate. Critics, which include members of Donald Trump’s new US administration, have said that the euro is “grossly undervalued” as a result.
And now, finally, the era of QE in Europe may be coming to an end.
In comments made yesterday to German news group Zeit, ECB committee member Jens Weidmann said that the time to ease up on QE was nearing. Weidmann also said that he’d be happy if QE bond buying stopped within a year.
This is highly significant for the future of the euro. If, or when, the European Central Bank stops QE it will lend enormous support to the single currency. Prices will rise and non-Europeans in need of euro currency will be paying far more expensive rates to get their hands on some.
Furthermore, there is a feeling among investors that European election uncertainty, which has been weighing on euro sentiment, has diminished.
In a live French presidential debate yesterday evening, Emmanuel Macron accused Marine Le Pen (the candidate who most threatens the stability of the eurozone) of wanting to start an “economic war” with France’s neighbours and of proposing a reduction in the spending power of French citizens (with her threat to remove France from the euro currency block and reinstate the Franc).
Macron’s recent aggressiveness towards Le Pen seems to be working if bookmakers’ prices are to be believed.
In February, bookmakers were suggesting a 33% chance of a Marine Le Pen victory in this month’s election. Today, priced around the 3/1 mark, odds suggest a reduced 25% probability of such an outcome. Emmanuel Macron, who is generally listed at odds of 4/7 (indicative of a 64% chance of victory), remains the hot betting favourite.
Big Banks Agree: The Euro Tide is Turning
Yesterday, Singapore’s second largest bank, UOB, amended its view on the euro, saying “the odds for a move lower have diminished.”
Also yesterday, the Bank of Tokyo-Mitsubishi’s FX department raised its year-end target for EUR/USD to 1.12, citing “limited downside” potential in the euro and reduced political risk.
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