Euro Nears 11-Year Lows Against USD Amidst ECB Policy Review.

Introduction

The euro has been hovering close to 11-year lows against the US dollar as investors brace themselves for the European Central Bank’s (ECB) forthcoming policy review. This move is expected to be the boldest yet in combating deflation and reviving the struggling eurozone economy. With markets anticipating a substantial quantitative easing (QE) program of at least 1 trillion euros, the ECB’s announcement on January 22 is eagerly awaited. The recent removal of the Swiss National Bank’s currency cap against the euro has further heightened pressure on the common currency. This article explores the factors contributing to the euro’s decline and speculates on the potential outcomes of the ECB’s actions.

Euro’s Decline and Market Expectations

The euro’s value has plummeted in recent times, trading at $1.1561 EUR/USD, not far from its 11-year low of $1.14595 recorded on Friday. Against the Japanese yen, it stood at 135.71 EURJPY=R, near a three-month low of 134.70. The imminent launch of a large-scale sovereign bond-buying program by the ECB, which is widely expected, has raised questions about its design and credibility. Analysts believe that the total QE amount to be announced will be the key focus. David de Garis, senior economist at National Australia Bank, stated that the market is anticipating a quantitative easing of 1 trillion euros.

Impact of the Swiss National Bank’s Decision

Last week, the Swiss National Bank (SNB) shocked markets by eliminating its three-year-old currency cap, which had previously prevented the Swiss franc from strengthening beyond 1.20 per euro. This unexpected policy shift has placed additional pressure on the euro, as the SNB had been purchasing billions of euros to maintain the currency cap. Following the SNB’s decision, the Swiss franc experienced significant appreciation, stabilizing around 0.99365 francs per euro EURCHF=R. Some market observers speculate that the SNB’s abrupt move was a preemptive measure to counteract the anticipated bold actions of the ECB.

ECB’s Potential Quantitative Easing Measures

In a bid to address deflationary concerns and stimulate the eurozone economy, the ECB is expected to introduce a comprehensive QE program. To ensure the success and credibility of the initiative, ECB President Mario Draghi reportedly met with German Chancellor Angela Merkel, who has been openly opposed to quantitative easing. The details of the program, including its size, duration, and the types of assets to be purchased, are yet to be disclosed. However, media reports suggest that the ECB’s actions will be aimed at boosting inflation and promoting economic growth in the eurozone.

Market Volatility and Currency Performance

Market participants are anticipating substantial volatility as a result of the ECB’s policy announcement. The euro’s struggles are evident against various major currencies, with the common currency near a four-month low against the Australian dollar (EURAUD=R) and a record low against the New Zealand dollar (EURNZD=R). Furthermore, the euro remains within reach of a 16-month low against the Canadian dollar (EURCAD=R) following the recent developments. The absence of US markets due to a public holiday on Monday has contributed to a relatively slow session, with limited market-moving economic data. However, investors are eagerly awaiting China’s fourth-quarter growth figures, which will be released on Tuesday.