european central bank meeting

[fxmade2trade]

what does this mean for the EUR/USD? since its been falling will we see the increase in june can we get above the 1.370 level?

 

[Traderallen]

I'm not 100% sure but I would suspect that with the negative interest rate that goes into effect Monday, June 8 that investors with money in European banks would want to start drawing down there accounts and moving that money elsewhere since it would cost them money to keep their funds in European banks. I would think that this would have a negative effect on the euro and we would see further downside over the coming months.

Fundamental analysis is not my strong point so I may be wrong. Maybe someone else on here has a better interpretation of what to expect.

 

[Peter Anderson]

I'm not 100% sure but I would suspect that with the negative interest rate that goes into effect Monday, June 8 that investors with money in European banks would want to start drawing down there accounts and moving that money elsewhere since it would cost them money to keep their funds in European banks. I would think that this would have a negative effect on the euro and we would see further downside over the coming months.

Fundamental analysis is not my strong point so I may be wrong. Maybe someone else on here has a better interpretation of what to expect.

Hi Traderallen,

On one hand, you are correct - lower or negative interest rates are likely to have a negative effect on a currency, if all else is held equal. However, there is also a common misconception that negative interest rates apply to individuals in the Euro area - they actually only apply to deposits by financial institutions that are held at the ECB overnight (and only on "excess" liquidity).

The ECB has 3 interest rates which it uses to guide monetary policy. All 3 current rates can be found here:

http://www.ecb.europa.eu/press/pr/date/2014/html/pr140605.en.html

The deposit rate is the one which has been moved to -0.10% . The negative deposit rate will only be charged on excess liquidity that banks and financial institutions deposit overnight at the ECB. One aim behind this is to get banks lending that excess liquidity to small and medium enterprises by mildly punishing them for holding the money at the ECB instead of using it to fuel economic growth and lending.

The deposits are only "excess" if they are above what is required as reserves against the bank's loan book. By encouraging banks to loan to small and medium sized businesses, the idea is that these excess reserves would become "Required" reserves, and would no longer be subject to the negative deposit rate.

People will probably not automatically begin withdrawing their money from European banks - as the banks still need to attract depositors, and so would not attempt to charge customers a negative interest rate. Also, the negative rate is on a fairly small portion of the funds in the Euro banking system.

I hope this clears up that part of the policy.

All the best,

Peter

 

[fxmade2trade]

I thank you so much, for all the information boy you both hit it right on seems the euro is still vulnerable to the shocks in the economy and if not monitored carefully could the euro area slip back into a recession?

 

[Peter Anderson]

Dear fxmade2trade,

Yes, it is definitely possible that the Euro area slips back in to recession - it has been out of recession for less than a year, so the economy is not exactly on solid ground compared to other developed economies. If you break it up in to the constituent economies within the Euro area, some are still mired in recession, like Greece, while some such as Germany are relatively strong - this is the challenge of having a one-size-fits-all currency and monetary policy. On the whole though the trend in Europe appears to be towards a recovery.

The ECB easing measures are likely to help keep the Euro out of recession, however it is also important what other major economies such as the US are doing. Some central banks are beginning to withdraw liquidity and tighten policy, or at least talk about it earnestly, and this will have an effect globally. The US is probably the most important, however China and Japan have quite a large global presence that could affect even a large economy like Europe.

No country can be insulated from outside forces, especially as economies and markets have grown more and more interconnected. So while Europe may be early in it's growth cycle, if the rest of the sneezes European countries may catch a cold - though hopefully not for a while!

All the best,

Peter

 

[fxmade2trade]

thank you so much peter and thank you for the links, VERY helpful