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Currency Analyst since 2010

Will the ECB strike back?

By Elizaveta Belugina

The currency war is underway. The Bank of Japan has made its move – now all eyes are locked on the ECB which is meeting tomorrow.

Analysts at Barclays say that it’s high EUR/JPY the ECB has to worry about. The pair approached a 6-year high after last week the Bank of Japan expanded its monetary stimulus program and Governor Kuroda has signaled today that the BOJ is ready to do more.

The European Central Bank needs the weaker euro to encourage inflation and economic growth. However, the BOJ’s actions put this scenario at risk, increasing pressure on ECB to come up with a policy response.

Analysts at Westpac say that unless Draghi follows the BOJ’s example and introduces large-scale government-bond purchases, or quantitative easing (QE), money borrowed cheaply in Japan will flow into the European assets, making EUR strengthen.

According to the consensus forecast, the ECB won’t change its policy on Thursday. Most experts think that the opinions about the sovereign asset purchases are divided among the ECB members. Reuters reported citing sources inside the central bank that Draghi’s colleagues were unhappy with his management style. Some specialists see a higher likelihood of additional easing at the December gathering.

The Bank of Japan is obviously better positioned in this war of easing. It will be pretty hard for the ECB to pull out the surprise card this week as it has much less ammunition than the BOJ. Still, there’s always a possibility of unexpected, and the art of central banking is to use such possibility. So far Mario Draghi was able to shake the market and set it in the direction he wanted. This time, the environment is very different, so it will be interesting to see how the ECB’s head will deal with the challenge, so fasten your seatbelts. Anyhow, our base scenario is more upside in EUR/JPY this week.

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