Kathy Lien | Sep 12, 2019 17:35
We can find at least 3 reasons for the turnaround in the euro. First and foremost, ECB President Draghi called on governments to go big with fiscal stimulus. He said "reform implementation must be stepped but substantially" to raise long term growth potential. The central bank has long felt that monetary stimulus alone won't be enough and by doubling down on a massive stimulus package, he's put the ball in their court. With his bold curtain call, Draghi is taking the problem of low growth seriously and saying now its time for the governments to act. Euro also u-turned on the hope that the stimulus will work as the promise of unending QE should go a long way in boosting the economy. The market also thinks that all of this guarantees a rate cut from the Federal Reserve next week and the prospect of Fed easing is bullish for EUR/USD.
Looking ahead, we believe that today's actions could mark a bottom for EUR/USD. One of the biggest near term risks for the euro is behind us. Christine Lagarde takes over as head of the ECB in November and like Draghi, she's a big supporter of fiscal stimulus. The difference between Draghi and Lagarde is that she's more politically rooted and could have a greater influence on Germany. If the Eurozone existed in a silo, we would declare this a sustainable bottom for euro. However, US President Trump made it very clear that he's not happy the ECB is "weakening the euro," so we need to be mindful of the risks including retaliatory actions from the US (including tariffs) and Brexit.
Written By: Kathy Lien
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