Thus, by scaling back its QE program, the bank recovers a valuable instrument for future action. Most likely, the main factor driving the decision to continue the program is inflation, which is still below the target.
On top of this, GDP growth is not yet satisfying, making the ECB’s case for continued asset purchases stronger.
Paradoxically, Mr Draghi’s announcement, even if it only pertained to a future reassessment of the QE program with no further commitments, was enough to help the euro soar against the dollar.
Besides making imports cheaper – hence putting further downward pressure on inflation –, exports are threatened by such a strong euro, which in turn hurts GDP. Exports by eurozone countries outside the EU have not been growing, a phenomenon observed even before the euro’s recent surge.
The latter will specifically impact multinational companies (many included in the pan-European Stoxx Europe 600 Index) – and hence governments via lower tax revenues. In the end, regardless of what European monetary authorities may wish, it seems that the strong euro is justified for now.
If we look at the trade balance of the EU and the eurozone, we see a strong surplus (see figure 5).
Additionally, internal demand has gotten stronger and the political menace represented by populist movements has subsided. Abroad, the U.S. is not doing much to prop up the dollar, including the passage of reforms that would strengthen its economy – and, therefore, its currency.
The recent volatility around the euro/dollar exchange rate represents, as always, an investment opportunity across a broad set of assets. Innealta’s quantitative analysts are closely monitoring the key variables that determine exchange rate movements, as well as any news developments that may impact its value.
This article was written by Innealta Capital, a participant in the ETF Strategist Channel.
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