Talking Points
- In a potentially important development, the Reuters newsagency quoted ‘sources’ as saying the ECB could delay or slow its tightening of Euro-Zone monetary policy due to worries about Euro strength.
- If true, that could weaken the currency by more than the limited reaction seen Thursday.
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Rapid gains by the Euro against the US Dollar are worrying a growing number of policymakers at the European Central Bank, raising the chance its €60 billion per month asset-purchase program will be phased out only slowly, the Reuters newsagency reported Thursday, quoting “three sources familiar with discussions”.
Given the ECB is currently expected to discuss so-called “tapering” of its monetary-stimulus policy at either next Thursday’s meeting of its Governing Council and/or the following meeting on October 26, prior to action early in the new year, the report is highly significant.
However, EUR/USD responded only modestly, easing from 1.1876 just before the report was published to 1.1868 late in the European session.
Chart: EUR/USD Five-Minute Timeframe (August 31 Intraday)
A strengthening currency tightens monetary policy indirectly so it would be no surprise if the climb in EUR/USD to above 1.20 earlier this week from below 1.05 at the start of the year was concerning ECB policymakers. So why such a limited reaction?
One possibility is that the report was not believed. Another is that traders in EUR/USD are now focusing on the Dollar side of the equation ahead of Friday’s US payrolls report. A third is that the markets were already aware of the impact the pair’s strength was likely to have on ECB decision-making.
However, it is also possible that the report was simply missed, suggesting there could yet be a reaction in due course. Or traders were focusing instead on earlier higher-than-expected Euro-Zone inflation data that will have boosted the case of the ECB hawks calling for a withdrawal of stimulus.
Either way, EUR/USD traders would be well advised now to watch for any comments backing, or denying, the Reuters report.
--- Written by Martin Essex, Analyst and Editor
To contact Martin, email him at martin.essex@ig.com
Follow Martin on Twitter @MartinSEssex
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