Following its meeting last week, the European Central Bank (ECB) made no significant alterations to its current monetary policy. The ECB kept interest rates at the same level and its quantitative easing package remains at 80 billion euros per month. That does not mean the CurrencyShares Euro Currency Trust (NYSEArca: FXE) is out of the woods.
Coming into this year, some market observers predicted the euro would not weaken against the U.S. dollar as much as was seen in the previous two years. The U.S. dollar has previously been strengthening on the prospect of a tighter monetary policy, which would help remove some of the excess liquidity sloshing around in the economy.[related_stories]
Most European market observers have been critical of European Central Bank President Mario Draghi’s stimulus measures. Specifically, many believe the measures have been too little too late, even after the ECB cut all three key rates this month and expanded quantitative easing.
Last week’s move by the ECB “was not an unexpected decision from the ECB and is similar to the recent actions of the Monetary Policy Committee of the Bank of England. While the EU referendum was a shock, it will take time to ultimately determine what effect the uncertainty will have on European economies. Recent terrorist events and the attempted coup in Turkey could also influence economic growth in the region. The ECB is targeting inflation at 2%, but inflation for June came in at only 0.1%,” according to OptionsExpress.
Should monetary policy in the U.S. surprise, further diverging from the ECB and the Fed hikes rates, the exchange value of the U.S. dollar will strengthen, or foreign currencies will depreciate relative to the greenback.