The Role of the European Central Bank (ECB) in Influencing the Value of Euro Currency

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Summary:

The primary objective of the ECB is to maintain price stability by keeping inflation at around 2%. To achieve this, the ECB uses interest rates as its primary tool.

The European Central Bank (ECB), located in Frankfurt, Germany, is the reserve bank for the Eurozone. It sets interest rates and manages monetary policy for the region. The primary objective of the ECB is to maintain price stability by keeping inflation at around 2%. To achieve this, the ECB uses interest rates as its primary tool. The Euro strengthens when interest rates are relatively high, and vice versa. The ECB Governing Council, which comprises the heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde, holds meetings eight times a year to make monetary policy decisions.

Quantitative Easing (QE), and how does it impact the value of the Euro?

In times of economic crisis, the European Central Bank can use a policy tool called Quantitative Easing (QE). QE involves the ECB printing more Euros and using them to buy assets from financial institutions and banks, such as government or corporate bonds. This usually leads to a weaker Euro. QE is only used when reducing interest rates is unlikely to achieve the objective of price stability. The ECB used this policy tool during the Great Financial Crisis of 2009-11, in 2015, when inflation remained stubbornly low, and during the COVID-19 pandemic.

Quantitative Tightening (QT), and how does it impact the Euro?

Quantitative tightening (QT) is the opposite of quantitative easing (QE). It is implemented when an economic recovery is underway and inflation rises. During QE, the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity. However, during QT, the ECB stopped buying more bonds and did not reinvest the principal maturing on the bonds it already held. This policy is generally positive (or bullish) for the Euro.

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N Faiszah Ishak

Traders' Opinions

On Thursday, the Euro (EUR) exhibited a positive trend, surpassing the 1.0900 level, mainly due to the weakness of the US Dollar (USD). Such a decline in the USD's strength resulted from the European Central Bank's (ECB) decision to maintain the interest rates unchanged at 4.5%.

On Wednesday, the Federal Reserve delivered a strong and confident message to investors. While the bank left interest rates unchanged, as anticipated, Fed Chair Jerome Powell clarified that interest rates peaked, with 17 out of the 19 policymakers forecasting rate cuts in 2024. This surprise move demonstrates the Fed's unwavering commitment to supporting the economy and ensuring sustainable growth for the future.

The bank has issued a warning regarding the potential rise in inflation in the upcoming months. The economic projections indicate an acceleration of the region's economy from an average of 0.6% in 2023 to 0.8% in 2024, followed by a growth of 1.5% in 2025.

After a recent decision, there has been a notable upsurge in risk appetite, which has led to a widespread sell-off of the US Dollar. The Euro experienced a noteworthy uptick of more than 100 pips, which led to fresh two-week highs that settled just above 1.0900. The pair appears to have stabilized at this range as traders await the European Central Bank's (ECB) decision, which is expected to be announced later today.

• The Euro maintained stability above 1.0900 after the European Central Bank's decision.

• The dollar is still struggling after the Federal Reserve's recent shift towards a more accommodative monetary policy.

• Investors are eagerly anticipating the press release from President Lagarde.

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Zi Cheng

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Fundamental Analysis

On the 19th of December 2023, Japan has released their last interest rate adjustment of the year and with no surprises, they have kept the interest rate the same which is -0.1%. Previously, the Bank Of Japan gave out rumours that they might increase the interest rates back in the positive region to fight against inflation rate which have immediately caused the JPY to gain strength aggressively.

Could USD/JPY Continue To Weaken After BOJ's Interest Rate Decisions?_1

Negative interest rates will devalue the currency value. The Bank Of Japan's decision this time could continue to weaken JPY's strength.

Technical Analysis

USD/JPY has been in a short term downtrend but still considered uptrend as price is still above the 200 Day Moving Average as this indicator is very good for identifying long term trends. JPY has been stronger than the USD due to rumours of Japan's positive interest rates but after the decision has been made it could reverse and continue to weaken hence changing the short term trend for USD/JPY. Current price is at a key dynamic support which is the 200 Day Moving Average, I personally will be waiting for price to break out of the short term downtrend then look for longs.

Could USD/JPY Continue To Weaken After BOJ's Interest Rate Decisions?_2

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Thomas

Palestinian-Israeli conflict

Latest news on the Israeli-Palestinian conflict

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Israeli media reported that six of the world's largest oil transport ships have stopped working in the Red Sea due to continued attacks and kidnappings by the Houthi armed forces. There are now a large number of warships from Western countries in the Red Sea, including the United States, Britain, Japan, South Korea, etc.

The coalition is expected to take military action in the coming days.

Latest News on the Israeli-Palestinian Conflict (December 19)_1