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EUR/USD Traders Weigh Whether Parity in the Cards Between ECB and Fed

EUR/USD Traders Weigh Whether Parity in the Cards Between ECB and Fed

Talking Points:

  • The ECB generated more confusion than speculative conviction with its announced extended QE program
  • Ambiguity in the European bank's program and heavy speculation for a Fed hike ahead may disrupt a parity drive
  • Risk benchmarks like the S&P 500 continue to climb - a good run if you put aside its fundamental issues

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Event risk has been heavy for the Euro and the world's most liquid currency pair has shown the results of those large fundamental explosions. Following the confused volatility after the Italian Referendum, EUR/USD marked another wide range day with a remarkable reversal this past session following the ECB rate decision. ECB President Draghi announced an extension of the groups two-year stimulus program beyond the initial March 2017 expiration. Through convoluted language and policy objectives, the new plan is steady 80 billion-euro-per-month stimulus purchases through March and then a 60 billion-per-month pace from April through the end of the year on a wider variety of assets. That would seem a massive easing effort a dramatic departure from the Fed's course of slow rate hikes. 'Seem' is the operative word here.

While the ECB is indeed on a dovish track, it is a well-known track. The markets have long ago assumed the group would have to extend their program through the March end date, but there was dispute on the pace and level of extension of the program. From the market's more dovish and conservative cadre, the belief was an additional six months as the same 80 billion euro pace originally planned. If we do the math on the ultimate size of the stimulus under the new regime and the old, they are not much different (60 billion euros). In a market questioning the effectiveness of stimulus, this does not bode well for a massive upgrade to force confidence. Furthermore, there are questions of the ECB's ability to implement with assets running thin as well as the group's commitment. If inflation rises, the language offered would leave open the ability to continue to reduce monthly purchases after April. This alone is not enough to get EUR/USD below 1.0500 much less parity.

Next week's FOMC rate decision looms even larger now. Yet, here too, the assumptions are well established. A presumed 25bp rate hike is baked in and presumably, the Dollar (and EUR/USD) already reflect that reality. Clarifying an accelerated pace of hike in 2017 may motivate the Greenback drive and pair's break, but that will be difficult to achieve. This is not a good time to have deep conviction on this critical financial lynchpin. Meanwhile, the S&P 500's explosive rally Wednesday drew continuation Thursday and carried more return-oriented assets with it. Conviction remains a question with last year's troubles, the risks still lingering (anti-trade, lackluster growth, artificially low volatility) as possible threats. Event risk over the final 24 hours has highlights for short-term volatility; but trends are difficult to believe in. We discuss the markets in the lead up to the weekend then the Fed in today's Trading Video.

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.