Forex trading has resulted in the EUR/USD pair rising in value in 2013. Those who trade the pair may benefit from knowing that the changes in the value of the two currencies were attributed by many to the stimulus of the central banks in both the U.S. and the euro zone. In addition, it was noted that speculation surrounding the actions that these financial institutions will take going forward was factored into the fluctuating value of the exchange rate.
EUR/USD rose last year
In 2013, the common currency rose more than 4 percent against the greenback. It is important to note the differences between the monetary policies being used by the Federal Reserve and the European Central Bank, as Kathleen Brooks, research director at Forex.com in London, told the news source that the latter is experiencing a decline in its balance sheet, while the former is still seeing increases.
The Fed announced at the conclusion of a policy meeting in December that beginning in January 2014, it would reduce the amount of bonds it purchased on a regular basis to $75 billion per month instead of the prior figure of $85 billion. Even though the financial institution indicated that its transactions were slowing, the balance sheet of the organization recently surpassed $4 trillion.
Brooks told the media outlet about how the changing policies of the Fed could result in the greenback rising in value.
“Once the Fed’s balance sheet starts to contract then we could see the dollar strengthen sharply, although this is unlikely to happen at all next year,” she told the news source.
Economic data key to tapering, says expert
However, another market expert emphasized that the pace with which the financial institution gradually reduces and then eliminates its bond purchases will hinge largely on the strength of the figures that are released in relation to the economy, according to Reuters.
“We think things are going to be very data-dependent,” Paul Chappell, chief investment officer of U.K.-based hedge fund manager C-View, told the news source. “At the moment that looks like U.S. numbers are going to be relatively robust compared with some other G7 peers, so the dollar is likely to be relatively robust versus other developed country currencies.”
Central Banks moving in different directions
Regardless of what the economic figures look like further down the road, central banks in varying jurisdictions are moving in vastly different directions in terms of their use of policy to affect the economy, according to Bloomberg. For example, the European Central Bank, which was scheduled to hold a meeting during the week starting on Jan. 6, has mostly made an effort to push stubbornly low price levels higher through the use of stimulus.
“The world’s main central banks have very different things going on, which is an opportunity for investors,” Scott Thiel, managing director, deputy chief investment officer of Fixed Income, Fundamental Portfolios and head of European and & Global Bonds for BlackRock Inc., told the news source. “It’s very important to look at the economies close to inflection points on monetary policy.”
Thiel predicted that central banks across the world have begun their slow withdrawal from using bond purchases to help manage economic growth and inflation, and that the move made by the Fed to start reducing these transactions represents the start of this new trend.
Another factor that could easily have an impact on the decisions of those who trade forex pairs such as the EUR/USD is the benchmark rates that central banks have. In November, the ECB announced its forecast that the 18-nation region could easily run into a “prolonged period” where the price level rises at a very modest rate, according to Bloomberg News.
In addition, Fed officials recently stated that they plan to keep their key rates low “well past the time that the unemployment rate declines below 6.5 percent,” the media outlet reported.
While it seems that both of these financial institutions will likely keep their borrowing costs low for some time, one market expert noted that the ECB may need to purchase assets if inflation in the euro zone does not pick up to adequate levels, according to Bloomberg.
Ken Wattret, who works for BNP Paribas SA in London as an economist, told the news source that the officials in the region’s central bank may opt to start off by buying private-sector securities since they have not formed a consensus opinion on whether they should purchase government debt.
A willingness to engage in further stimulus has been indicated by Mario Draghi, president of the ECB, the media outlet reported. This key official has promised to keep interest rates at a low level for an “extended period,” and has refrained from indicating that rates cannot be cut any further.
Such a situation could easily have any impact on forex trading and the value of the EUR/USD.
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