With the EUR/USD now looking to the fourth quarter of the year, the focus for investors will be whether the common currency can hold to the impressive gains made this year. The euro currency has been undoubtedly one of the top performing currencies this year as the technicals point to a nascent uptrend that is likely taking shape.
Battle of the central banks: FOMC Vs. ECB
Still, with both the ECB and the FOMC pushing major decisions into the fourth quarter, a lot could change. It is quite clear that both the central banks are on a hawkish outlook. However, the conviction for the euro clearly overshadows that of the US dollar. Why is that?
Hawkish ECB?
For the most part, the hawkish outlook from the ECB in regards to tapering is supported by underlying growth. The eurozone growth momentum has been strongly entrenched on all corners. GDP is expected to continue to rise or at the very least stabilize at the current levels.
Inflation has also shown signs of underlying pressures. The eurozone’s headline CPI is still below the ECB’s 2% target rate, but with the upside momentum in consumer prices, the timing looks to be appropriate for the markets to digest a tapering announcement.
The ECB, in its meeting in September, postponed the decision to announce tapering to the October end meeting. Whatever announcement is likely to be made, it is only expected to be implemented after the current course of QE is completed by December. The eurozone’s current QE purchases amount to about 60 billion euro per month. There is speculation that this could be cut to 40 billion euro.
While the tapering decision might seem hawkish, ECB officials are maintaining a unanimous tone that the accommodative monetary policy will be here for long. As ECB’s Draghi cited many times, premature exit from QE could boomerang.
Francois Villeroy de Galhau, an ECB governing council member, echoed these views last week. Speaking in Paris, he said that the ECB was faced with a rather simple task which was to maintain its mandate of price stability and progress towards the inflation target. “We have to reduce the intensity of our net asset purchases, while maintaining overall a substantially accommodative monetary policy,” he said.
