Why Euro Looks Stuck Even as Fed Gears Up to Move

On a trade-weighted basis, the euro has actually risen since quantitative easing started in 2015
The Wall Street Journal

By RICHARD BARLEY
Aug. 30, 2016 7:36 a.m. ET
3 COMMENTS
Once upon a time, signs the Federal Reserve was gearing up to increase rates would have been big news for the euro. Policy divergence was a key focus for foreign-exchange traders. But times have changed.

True, the euro declined against the dollar in the wake of the Jackson Hole conference, but it was far from an extraordinary move. And the bigger picture is that at $1.117, the single currency is in the middle of a relatively narrow range that has held since February.



Friday’s U.S. jobs data could yet wake the market from its torpor, since it will further determine the market’s view of the likelihood of a near-term move by the Fed. But even that may yet prove a temporary affair. While Fed Chairwoman Janet Yellen’s speech Friday signaled a higher chance of a rate increase, it also pointed to greater uncertainty and caution over the future path of rates. That suggests that any downward move for the euro might struggle to gain momentum.

Meanwhile, expectations for further European Central Bank action are limited. An extension of bond purchases beyond the current indicated end-date of March 2017 seems likely, but that would mark continuity, not a new phase in policy divergence. And the ECB seems more focused now on trying to boost growth and inflation through easing credit conditions than via the currency channel. On a trade-weighted basis, the euro has actually risen since quantitative easing started in 2015.

The euro, like the Fed, remains dependent on U.S. data. Unless Fed officials begin to show greater confidence that the U.S. economy can sustain notably higher rates, the euro looks set to remain stuck in a rut.

Write to Richard Barley at richard.barley@wsj.com