EUR/USD Wobbles as ECB May Do More Harm than Good

Euro starts to weaken
USDJPY at fresh highs
Nikkei 0.96% Dax 0.94%
UST 10Y 1.72%
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Europe and Asia:
No Data

North America:
USD PPI 8:30

The euro was starting to wobble in early European dealing today as the pair once again drifted towards the key 1,1000 level ahead of the very important ECB rate decision tomorrow.

In an otherwise quiet session with little news flow, the EURUSD was markedly weaker trading near the lows of the session as markets anticipated that the central bank would offer a new package of monetary stimulus that would include a rate cut and perhaps the resumption of QE.

Many market players are skeptical that any form of monetary stimulus would be of benefit to the region as the Eurozone does not suffer from the availability of credit or liquidity but rather demand. In fact, some the analysts have pointed out the paradox of easing could actually exacerbate the slowdown in growth as it would make EU rates even lower and thus make saving much more difficult,

n the EZ, unlike in US savers traditionally allocate the vast majority of their funds to fixed income instruments rather than equities. With rates already negative across the region, saving becomes even more difficult, requiring more and more capital thus dampening demand. More QE, therefore, creates a vicious rather a virtuous cycle with respect to growth and not only becomes ineffective but rather counterproductive.

Unfortunately, Mr. Draghi and the ECB council are constrained by the rules of the region which do not allow coordination between fiscal and monetary authorities. Over the past several months EU policymakers have become keenly aware of this problem and there may be some activity behind the scenes to create a much more united response to the problem. Any real action, however, will have to wait for Mr. Draghi’s successor Ms. Legarde who is well skilled at building consensus across a wide swath of political institutions. For now, the markets may simply want to see if Mr. Draghi delivers a temporary shot of adrenaline to the financial system by reviving QE and repairing the balance sheets of the region’s banking sector.