EUR/USD Rallies after ECB Moves Closer to Stimulus Plan

By FX Empire Analyst - James Hyerczyk
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The EUR/USD reversed course as traders reacted to the news that the European Central Bank may agree to buy distressed government bonds in unlimited quantities. Additionally, in order to prevent this from causing inflation because of a boost in money supply, the central bank said it would sterilize the purchases. The news triggered an intraday rally which sent the currency pair to 1.2621, slightly below last week’s high at 1.2634.

 Traders like the proposal because it would not offend the Bundesbank since it would not require the printing of money. The ECB is also likely to agree that it would not set a public cap on yields.

 The recent weakness in the Euro continued early in the session after the final reading of the August purchasing managers’ index for the Euro Zone services sector was reported at 47.2. This number was down from 47.9 in July and an earlier estimate of 47.5. This news shows a contraction in the economy which probably puts pressure on the ECB to act soon.

 The GBP/USD is also benefiting from the weaker dollar and the ECB news. In addition, the Sterling got a boost from a report showing that theU.K.recession may be easing. Interest rates firmed a little in the U.K. after it was reported that services growth grew faster than estimated in August. This is leading to speculation that the Bank of England may refrain from expanding its bond-purchasing program on September 6.

 Besides beating economist estimates, the news may have caught short traders by surprise ahead of tomorrow’s important monetary policy meeting. All of this being said, the news from the ECB is probably having the most influence on the price action in the British Pound since stabilization of the Euro region will have a bigger impact on the U.K. economy at this time. 

October Crude Oil is trading lower today despite the weaker dollar and forecasts for lower inventory figures on Thursday. Typically, a weaker dollar gives commodities priced in dollars a boost, but this week, traders appear to be hedging themselves ahead of Thursday’s European Central Bank meeting and Friday’s U.S. Non-Farm Payrolls report. Losses are being limited on the thought that refineries drew down supply last week ahead of Hurricane Isaac. 

December Gold is trading mixed-to-flat as bullish traders continue to battle the psychological $1700.00 price level. The weaker dollar is helping to underpin the precious metal but like crude oil traders, gold traders may be standing on the sidelines ahead of tomorrow’s ECB and BOE central bank meetings.

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