USD & EUR Flat on Upcoming Central Bank Meetings

Alan Penny

9 December 2019

4 min read

USD/EUR forex analysis

  • Fed and ECB meetings scheduled for later this week
  • Rates expected to remain steady in the United States
  • ECB meeting will be the first with Lagarde as president

Monday’s Asian session saw little change in the US dollar and euro as investors appeared to be waiting to see the results of the central bank meetings scheduled for later in the week. Thus, the US dollar index didn’t experience a lot of movement at 97.685.

Markets expect both the Fed and the ECB to leave rates untouched.

The US Federal Reserve is scheduled to hold its policy meeting on Wednesday, while the ECB meeting will take place on Thursday, December 12. Markets expect both the Fed and the ECB to leave rates untouched.

Fed Expected to Keep Rates Steady

The US Federal Reserve has already reduced the interest rate three times this year. The goal was to protect the US economy from the economic slowdown occurring in the rest of the world.

However, the market expects that the Fed will keep rates as they are this time around. After the latest cut in October, Fed Chair Jerome Powell stated that the economy and monetary policy were in a good place. He also indicated that there wasn’t much that could prompt further rate cuts.

This is after the Fed increased rates four times in 2018. In other words, 2019’s monetary policy was a major shift. In fact, Powell admitted as much during October’s press conference:

“We’ve made very substantial adjustments to policy. We entered the year expecting some further rate increases; we went to ‘patient.’ Now, we’ve done three rate cuts. It’s a very substantial shift, and the effects of it will be felt over time.”

However, these cuts have allowed the Fed to take a wait-and-see approach. They no longer have to find ways to protect the economy from the global trade situation. At the end of November, Powell said he was more optimistic and that this year’s policy decisions were already helping.

These comments have led to traders expecting rates will remain unchanged. Research indicates that markets react negatively when monetary policy moves are unexpected. Even if the change is perceived as positive, markets don’t like surprises.

Thus, central banks prefer to communicate more than some might consider necessary. They also tend to follow through with market expectations. Therefore, it’s likely that the Fed will keep rates steady.

ECB Expected to Be Done with Easing

The European Central Bank’s meeting on Thursday, December 9, will be the first under Christine Lagarde’s leadership.

According to a Bloomberg survey, economists expect the ECB to maintain rates. This is after repeated cuts to protect the Eurozone economy from downside growth risks. It’s also amid concerns of how the current negative 0.5% rate will affect financial stability.

Politicians and banks are already pressuring President Christine Lagarde to do something about the negative rates. They say the financial system is suffering, as are people trying to save money.

Lagarde is set to announce a strategic review of the ECB’s activity. Investors feel that her review will have to look into other ways the central bank can stimulate inflation. The pressure will be high for the ECB to avoid rate cuts as an easing measure again.

In September, Mario Draghi fought against strong opposition in the ECB’s Governing Council to pass a series of measures. These included lowering the deposit rate to negative 0.5%, providing banks with less stringent terms for long-term loans, and resuming quantitative easing.

Policymakers are worried that negative rates will affect financial stability. In an effort to make a profit, investors will look for investments with higher levels of risk.

Thus, experts no longer expect the ECB to cut rates next year. In fact, they expect the ECB to change its guidance by Q3 2020. Their current stance is that rates will remain as they are – or lower – until they reach their inflation target.

Economists are predicting that the ECB will keep their monetary policy unchanged for the next two years. They also say that the next move will likely be a rate increase by Q1 2022.

Climate has been another of Lagarde’s important talking points. She has promised to find ways for the ECB to be more active in supporting climate issues. However, many experts feel that climate won’t be part of monetary policy decisions for at least the next year.

Written By
Alan Penny

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