Home » EUR » Euro or US Dollar; Who Will Win in the Battle of Monetary Policy?

Euro or US Dollar; Who Will Win in the Battle of Monetary Policy?

ECB President Mario Draghi

The Euro to US Dollar exchange rate has slumped today, as markets get ready for this week’s key monetary policy meeting.

EUR USD has fallen -0.4% to 1.1735, but could rebound sharply later in the week.

Both the Euro and the US Dollar have been strongly affected by the monetary policy outlooks for their respective economies.

Will European Central Bank Monetary Policy Meeting Boost Euro with Taper Decision?

Markets have been waiting a long time now for the European Central Bank (ECB) to begin discussing changes to the quantitative easing programme.

ECB President Mario Draghi has claimed that interest rates cannot be raised until the central bank has exited its bond-buying programme, which is currently scooping up €60 billion of assets every month.

Therefore QE is a barrier to higher interest rates, so suggestions it will soon start to wane are cheering the markets.

It is widely expected that policymakers will discuss quantitative easing in this week’s meeting – after many months of refusing to even bring up the topic – and decide upon tapering the scheme.

This would give the Euro a boost, as deciding to wind down QE would bring the ECB closer to hiking interest rates.

Can USD Continue Coasting on High Bets of Federal Reserve Interest Rate Hike?

The US Dollar has managed to trend somewhat with immunity to the latest domestic data over the past few days, thanks to sky-high market bets of an interest rate hike in December from the Federal Reserve.

Odds of a hike are currently at 91.7%, although these could be subject to change if this week’s durable goods orders figures, advance trade balance and finalised gross domestic product figures for the third quarter disappoint forecasts.

However, even if odds remain high, this may actually benefit the Euro heading into this week’s European Central Bank (ECB) meeting.

Traders have already largely priced-in the prospect of monetary tightening at the end of the week, meaning it is developments from the Eurozone that are most likely to guide the EUR/USD exchange rate higher or lower.

The US Dollar could therefore find itself pressured lower by the fact that the Euro has more potential for upside risks.

EUR USD Forecast to Strengthen if ECB Announces QE Taper

Markets may be firmly expecting the announcement of a plan to taper quantitative easing, but that is by no means guaranteed.

Any delays to such a move would cause the Euro to slump as it would push back the date of any future interest rate hikes.

While any QE taper would be welcome, markets will react positively to a swifter exit; as long as it isn’t so speedy that it threatens a dreaded ‘taper tantrum’ from investors.

Credit Agricole CIB FX Strategy Research states;

‘It is widely expected that any extension of the asset purchases should come at a slower monthly pace with market views seemingly divided between a six-month extension at a pace of EUR40bn and a nine-month extension at a pace of EUR30bn.’