Volumes, volumes, volumes

Analysis: Brace for FX Volatility as ECB Sends EUR/USD Bulls Running

Despite some members of the Fed not admitting it, market turmoil in recent weeks casts serious doubts on a rate

The European Central Bank (ECB) has downgraded economic growth and inflation forecasts, pressuring the euro and following up on a call by the International Monetary Fund (IMF) this morning for major central banks to keep monetary policy accommodative.

The move is also casting doubts on the speculation that the U.S. Federal Reserve might raise rates in September. Echoing September 2014, the ECB is the first major central bank to move currency markets in a big way and cause repricing of risk across the board as European stock markets rally.

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FX volatility is rising once more

Last September the ECB was the first trigger for rising FX volatility across the board, and its move today is likely to support higher trading volumes this quarter after a relatively quiet summer.

Brokers have been reporting substantially higher trading volumes ever since the Chinese market turmoil was reignited in mid-August. Finance Magnates expects that the rising volatility in recent weeks is here to stay and we are almost certain that the Federal Reserve will refrain from raising rates at its meeting later this month.

Up until the beginning of this week the implied probability for a rate hike by the Fed was just above 35 percent. This means that if the expected monetary policy action fails to materialize, the markets will undergo a repricing of foreign exchange risks.

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EUR/USD bulls heading for the exit

The EUR/USD rate lost two big figures after the decision by the ECB to increase the maximum quantity of outstanding debt has surprised traders. The rate sharply dropped from 1.1230 to 1.1100 as of writing. The President of the ECB Mario Draghi said that the governing council of the central bank stands committed to do more easing should the necessity for easier monetary conditions arises.

A major point during his press conference was the increase of maneuvering capability of the central bank. After the quantitative easing program was launched, the maximum amount of the outstanding debt of a single country that the ECB could purchase was limited to 25 percent. The figure has been increased to 33 percent, which sent the euro into a tailspin.

IMF warning against premature tightening of monetary policy

The IMF has has highlighted in an announcement this morning that the economic growth in the first half of 2015 has been broadly lower than in the first half of 2014. With emerging markets being outlined as the main point of worry alongside weaker recoveries in some advanced economies the institution issued a note of worry targeted at global central bankers.

Advanced economies should maintain supportive policies. In most advanced economies substantial output gaps and below-target inflation suggest that the monetary stance must stay accommodative. Managing high public debt in a low-growth and low-inflation environment remains a key challenge,” the IMF statement reads.

More easing ahead?

Commenting on the statement released by the ECB, Senior Analyst at FxPro, explained, “The ECB has admitted that deflation risks have still not gone away in a very dovish statement at their press conference today following their decision to keep interest rates at historical lows. Mario Draghi even went as far as to say that the Eurozone could easily experience some months of deflation in the near future.”
“The underlying message this gives investors is that certainly for the ECB, the end of monetary stimulus measures are a long way off. On several occasions in the statement and during the Q & A session Draghi referred to the risks from slowing growth in emerging economies and this is something that has been a recurring theme at both Bank of England and Federal Reserve meetings throughout this year,” Mr Campbell concluded.

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