ECB Quick Analysis: Winning the currency war without firing a shot – EUR/USD may crash
- The ECB left its policy unchanged but opened the door to act in September.
- The euro has fallen on prospects of action.
- Draghi has prepared EUR/USD to extend its falls on the Fed decision.
Mario Draghi is Super Mario once again. The European Central Bank has left its interest rate unchanged but still sent the euro down. The Frankfurt-based institution has opened the door to rate cuts, tiering of the deposit rate and most importantly – a new round of Quantitative Easing – or money printing to devalue the euro.
EUR/USD initially rose on the "no cut" news but quickly dropped. Investors have realized President Mario Draghi's open door to act.
And it may go further down.
Draghi has kept his powder dry but made the euro more vulnerable ahead of the US Federal Reserve's decision next week. The Fed is set to cut interest rates for the first time since the crisis – and this is already priced into the dollar. The reaction to the Fed depends on the message that it conveys – a one and done rate cut or the beginning of a loosening cycle.
The shrewd ECB President has left the notion that the ECB is ready to take significant steps and left the details to September. If the Fed hints of a single "insurance" cut, EUR/USD has room to fall on the stark difference between the policies.
And even if the US central bank indicates a long loosening cycle, it will only have matched the ECB ~ which may then add further stimulus to outdo the Fed if needed.
It seems like a win-win situation for the ECB and a lose-lose for EUR/USD. The Frankfurt-based institution would like a weaker exchange rate in order to boost exports and drive inflation higher.
Draghi – which ends his tenure in November – has proved his mastery. Get ready for more EUR/USD downfalls.
Author
Yohay Elam
FXStreet
Yohay is in Forex since 2008 when he founded Forex Crunch, a blog crafted in his free time that turned into a fully-fledged currency website later sold to Finixio.
