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3 Reasons Behind EURO's V-Shaped ECB Reversal

  • Kathy Lien
  • 13 September 2019

Daily FX Market Roundup Sept 12, 2019

 

The European Central Bank went above and beyond today in rolling out a massive stimulus package. Their actions not only reflect their desperation but also their resolve to boost the Eurozone economy and mitigate the risk of recession. These were the five steps taken today and when they were first announced, the combination of efforts drove EUR/USD to a low of 1.0927. The ECB also lowered their inflation and GDP forecasts for 2019 and 2020. According to ECB President Draghi, their actions were prompted by 3 elements - a more marked slowdown in the Eurozone economy, the persistence of downside risks and their baseline scenarios that included downward revisions to all of their inflation projections. However instead of extending its losses below 1.09, EUR/USD reversed sharply after Draghi's press conference to trade well above 1.10.

 

5 Part ECB September Stimulus Package

  1. Interest rates cut by 10bp to -0.5%
  2. ECB dropped their calendar guidance
  3. Restarted bond purchases
  4. Changed their TLTRO rate to eliminate 10bp spread and provide more favorable bank lending conditions
  5. Introduced a 2 tier reserve system that would exempt part of bank holdings from negative rates

We can find at least 3 reasons for the turnaround in the euro. First and foremost, ECB President Draghi called on governments to go big with fiscal stimulus. He said "reform implementation must be stepped but substantially" to raise long term growth potential. The central bank has long felt that monetary stimulus alone won't be enough and by doubling down on a massive stimulus package, he's put the ball in their court. With his bold curtain call, Draghi is taking the problem of low growth seriously and saying now its time for the governments to act. Euro also u-turned on the hope that the stimulus will work as the promise of unending QE should go a long way in boosting the economy. The market also thinks that all of this guarantees a rate cut from the Federal Reserve next week and the prospect of Fed easing is bullish for EUR/USD.

 

3 Reasons for EURO Recovery

  1. ECB lays on fiscal stimulus pressure
  2. Unending QE will have positive impact on the economy
  3. ECB actions guarantee Fed cut next week

Looking ahead, we believe that today's actions could mark a bottom for EUR/USD.One of the biggest near term risks for the euro is behind us. Christine Lagarde takes over as head of the ECB in November and like Draghi, she's a big supporter of fiscal stimulus. The difference between Draghi and Lagarde is that she's more politically rooted and could have a greater influence on Germany. If the Eurozone existed in a silo, we would declare this a sustainable bottom for euro. However, US President Trump made it very clear that he's not happy the ECB is "weakening the euro," so we need to be mindful of the risks including retaliatory actions from the US (including tariffs) and Brexit.

 

 

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About the Author
Kathy Lien
Kathy Lien is Managing Director and Founding Partner of BKForex. Having graduated New York University’s Stern School of Business at the age of 18, Ms. Kathy Lien has more than 13 years of experience in the financial markets with a specific focus on currencies

Ms. Kathy Lien is Managing Director of FX Strategy for BK Asset Management and Co-Founder of BKForex.com. Her career started at JPMorgan Chase where she worked on the interbank FX trading desk making markets in foreign exchange and later in the cross markets proprietary trading group where she traded FX spot, options, interest rate derivatives, bonds, equities, and futures.

In 2003, Kathy joined FXCM and started DailyFX.com, a leading online foreign exchange research portal. As Chief Strategist, she managed a team of analysts dedicated to providing research and commentary on the foreign exchange market.

In 2008, Kathy joined Global Futures & Forex Ltd as Director of Currency Research where she provided research and analysis to clients and managed a global foreign exchange analysis team. As an expert on G20 currencies, Kathy is often quoted in the Wall Street Journal, Reuters, Bloomberg, Marketwatch, Associated Press, AAP, UK Telegraph, Sydney Morning Herald and other leading news publications.

She also appears regularly on CNBC’s US, Asia and Europe and on Sky Business. Kathy is an internationally published author of the bestselling book Day Trading and Swing Trading the Currency Market as well as The Little Book of Currency Trading and Millionaire Traders: How Everyday People Beat Wall Street at its Own Game all published through Wiley. Kathy’s extensive experience in developing trading strategies using cross markets analysis and her edge in predicting economic surprises serve key components of BK’s analytic techniques.