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March 11, 2016

Why was Euro Currency Appreciated With ECB’s Stimulus Policy?

Why was Euro Currency Appreciated With ECB’s Stimulus Policy?

ECB’s ambition to hit the target of 2% inflation rate was put into business more seriously last night. Mario Draghi, the President of European Central Bank, ensured that ECB will give its utmost best to get to that level. ECB has decided to continue the stimulus by acquiring €80 Billion worth of assets, adding the previous same amount of assets. This particular program also includes corporate bonds in its portfolio so that ECB will not run out of instruments to buy.

ECB also cut the deposit rate to -0.4% from -0.3%. This policy will encourage European banks to lend their money to businesses. However, there is still a worry that the non-performing loan will grow as Europe’s export to China is dipping down in number.

The stimulus policy and rate cut were responded counter-wisely by the market. EUR was appreciated to $1.12 level. One of the reasons was the market considers that Europe is almost out of ammo to shoot the target. The indication could be that “the interest rate probably will not fall any deeper”.

The situation in Europe is not in the most supportive state to achieve the target right now. The inflation rate projection is targeted to be at 0.1% this year. Draghi is an ambitious man who will find lots of ways to accomplish his mission. It is not impossible that this policy will be accompanied by other policy along the road to ensure that the Euro currency will be depreciated to the ECB target.

Thus, Euro currency appreciation is an impact of market reaction to Draghi’s statement. Even so, does it suit the EUR in long term? It is hardly believed so as most will find it unwise to hold EUR for the longest time in such stimulus condition. In long term, the EUR/USD is still bearish.

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