Dollar Strengthens Broadly Before Big ECB Meeting
Frankfurt (Dec 3) The U.S. dollar climbed on the euro and yen on Wednesday driven by diverging central bank policies, mixed data, and weak commodity prices ahead of tomorrow’s critical European Central Bank (ECB) meeting.
The 18-member single unit slipped to a new two-year low (€1.2326) during this morning’s European session with expectations of further easing running ahead of the ECB rendezvous. The greenback, meanwhile, spiked to a seven-year high against the yen after U.S. Federal Reserve officials raised expectations of a rate hike in mid-2015 with upbeat commentary on the state of the American economy.
Today marks the beginning of the last three days of market event risk before the annual holiday “funny” price season really begins despite the two-day Federal Open Market Committee meet that begins on December 16.
The EUR has been driven lower by confirmation from today’s swath of purchasing managers’ index (PMI) services data that the eurozone economy remains fragile, while disinflation builds. The November composite PMI fell to 51.1, from the flash 51.4, down a full point from October’s announcement. Digging deeper, the new orders component has contracted for the first time in 18 months, while prices point to inflation risks remaining to the downside. None of this is new to eurozone policymakers — they have talked enough about it of late, but will they react?
More Rhetoric from Draghi and Company
The data further supports the case for quantitative easing (QE). Persistently low inflation and a flagging economic recovery have certainly upped the pressure on the ECB to expand its program of asset purchases. This course of action would have an obvious negative impact on the EUR, nevertheless, the market is pricing in QE being delivered in the first quarter of 2015 and not tomorrow. Many expect Draghi and company to further lay the “foundation” for QE. In other words, make sure that politicians and the general public truly understand what it means and its justification. The danger is that so many are betting against the EUR, that if the ECB does not deliver or throw a dovish bone, the single currency could rise once again and ruin many individuals’ holiday festivities.
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