ECB disappointment could see EUR/USD move higher

Kill joy Germany

None of this is a dead certainty. Germany for one has been critical of the ECB with even calls to cancel it's very successful Outright Monetary Transactions program, which has been vital for driving down borrowing costs for peripheral Eurozone countries without ever being deployed.

Exploring more creative forms of monetary policy, such as quantitative easing, are not likely to be contemplated at this stage not least because it might be too difficult for Germany to swallow politically. Another issue is that the ECB has very conservative views on fiscal policy and there is a steady shift in Europe toward easing up on austerity programs. The ECB therefore may take the view that there is less need to rely so heavily on monetary policy.

The real problem in the Eurozone is the lack of demand and the fact that 'cheap money' is in many cases simply not reaching households or small businesses. As the ECB has often said, it is limited in what it can do to stimulate an economic recovery.

So given the EUR has been steady recently, a rate cut might be the best the forex markets can hope for. The ECB only tends to engage in extreme measures when under extreme duress, such as when the EUR is collapsing and peripheral government bond yields are soaring. That's not happening right now. 

So market expectations might be set for disappointment and that could see EUR/USD make gains on the upside. It seems some traders are already contemplating such as outcome.

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About the Author
Justin Pugsley

Justin Pugsley is the forex and gold markets analyst for New Zealand-based trading platform provider MahiFX. He is a keen student of markets, economics and history. Prior to working with MahiFX, Justin worked for a number of leading media organisations such as Thomson-Reuters and Dow Jones/Wall Street Journal.

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