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ECB more likely to ease monetary policy weighing on the euro - MUFG

FXStreet (Delhi) – Lee Hardman, Currency Analyst at MUFG, suggests that the Paris attacks have reinforced euro selling pressure ahead of the ECB’s upcoming monetary policy meeting on the 3rd December by increasing the likelihood that the ECB will deliver further monetary easing.

Key Quotes

“ECB Chief Economist Praet remarked in an interview yesterday that the main issue is the difficult economic context in which the attacks have taken place with the euro area still working through the aftermath of a balance sheet recession as it recovers moderately. The attacks may even have raised downside risks to the economic outlook in the euro-zone which had already been increasing.”

“A similar view was echoed by ECB Vice President Constancio who stated yesterday that “markets so far are taking it calmly and not reacting too much. If there would be no further consequences, the impact would not be very significant.” However, if they affect consumer and business confidence and risk aversion, the “consequences can of course be worse”.”

“Overall the events make it even more likely that the ECB will deliver further monetary easing on the 3rd December. The ECB has already signalled strongly that it will deliver further easing if downside risks to the economic outlook remain in place by their next meeting, and with downside risks having increased since their last meeting it looks almost a done deal that the ECB will soon deliver further easing which should keep the euro under downward pressure heading into early December.”

“With the Fed on course to begin raising interest rates in December, it provides a great opportunity for the ECB to hammer home the signal monetary policy will diverge significantly between itself and the Fed helping to weaken the euro.”

“The EUR/USD rate and dollar index are also both approaching key technical levels at 1.0500 and 100.00 respectively. A break of those key technical levels is likely to encourage a further extension of the weaker euro and stronger US dollar trends heading into year end. Downside risks for EUR/USD are clearly building in the near-term which could result in it falling towards parity earlier than we are currently forecasting and challenge the current Bloomberg consensus view that it will stabilize at current levels in the year ahead.”

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