Euro Slides as ECB Tapers QE Purchases

The euro has took a pause on Friday, following sharp losses in the Thursday session. EUR/USD dropped 1.3% after the ECB announced that it was reducing its asset-purchase program.

Currently EUR/USD is trading just above the 1.06 line. On the release front, Germany’s trade surplus fell to €20.5 billion ($21.72 billion), short of the forecast of 20.8 billion. In the US, Friday’s key event is UoM Consumer Sentiment, with the index expected to jump to 94.3 points, MarketPulse reported.

As expected, the ECB kept interest rates at a record low 0.00%. The bank has shown a ‘hands off’ policy, leaving the rate this level since January.

However, the ECB did make a major move with its quantitative easing program. The program, which was due to terminate in March 2017, has been extended until December 2017. The monthly purchases of €80 billion will be cut to €60 billion in April.

ECB President Mario Draghi said that reducing current purchases did not amount to tapering, but the markets weren’t buying his argument. The bold move to cut purchases can be supported the fact that the eurozone economy has shown improvement in the latter half of 2016, and inflation and growth projections for the eurozone have been revised upwards.

Still, there are rough waters ahead for the eurozone, which must deal with the fallout of the Italian referendum as well as upcoming negotiations with Britain ahead of its withdrawal from the European Union.

The Federal Reserve will once again be on the center stage next week as the Fed meets for its monthly policy meeting. This will be the first meeting after Donald Trump’s election as president. More importantly of course, the markets have priced in a rate hike at 95%, most likely a quarter-point increase.

This would mark the first hike by the Fed since last December, and anticipation of a hike has translated into strong gains for the greenback. It will be interesting to see what happens early next year, with the Trump administration taking over in Washington.

Trump has stated that he plans to increase government spending and cut taxes, which could lead to higher inflation levels. The Fed has indicated that it plans to raise rates gradually in 2017, but this could change once the new administration’s economic policies become clearer.