Two of the largest economies are facing the biggest decisions of 2015, one preparing to ease monetary policy further, one preparing to tighten monetary policy, but what is the final factor and who will react?
The European Central Bank’s Mario Draghi in his press conference has almost guaranteed a second wave of stimulus for the Euro area in December of this year. December is also the next potential meeting that Fed Chair Yellen could raise interest rates in the US for the first time since 2006. We’ve known for a while, 2 of the world’s largest central banks are pulling monetary policy in opposing directions, however acting in the same month could send EURUSD to a new low.
December, historically a low volatility month, could potentially have the 2 biggest policy changing decisions of 2015 to end the year with a bang for the various financial markets.
A summary of what we know
- Low Oil prices and EURUSD trading around 1.1700 (high of 6month range) counteracts the European Central Bank’s stimulus program
- Pressure and volatility surrounding China and the already strong dollar has delayed the Fed hiking already
What’s happened recently?
- After the dovish September FED meeting, EURUSD traded near the high of its 6month range, threatening European inflation making exports more expensive.
- After ECB QE2 announcement, EURUSD traded to a 2 month low, making the dollar stronger and could influence the Fed’s thinking on monetary policy to delay further.
- Global equities have continued to rally, oil prices have dropped to below $50 a barrel.
What are the possible outcomes?
- The Fed hike in December
- The Fed don’t hike in 2015, due to a strong dollar, push back forecasts, sending EURUSD higher, forcing the ECB to act.
- ECB ease further in December
- ECB cap euro strength after a Fed hike by cutting the deposit rate further
- The continued rally in global equity markets gives the Fed a cover to hike rates
The outcome either way will be a split in transatlantic policy or a united extension of “easy money”.
EURUSD currently trading around 1.1050, with a latest Fed meeting schedule for released tomorrow at 6:00pm UK time.