Euro Hovering Near Two Year Low Amid Hopes Of Monetary Stimulus

eu4The euro is hovering close to 2 year low amid rising speculation that the European Central Bank (ECB) will announce later today new plans to provide additional monetary stimulus across  the 18 member euro area currency union that is faced with low inflation levels, sluggish growth, and the threat of deflation.

On November 28th a flash estimate of euro area inflation from Eurostat showed that euro area inflation for November is expected to be 0.3 percent, meeting consensus estimates, but dropping below October’s 0.4 percent. That is distant from the ECB’s inflation target of just below 2 percent.

Last month ECB President Mario Draghi pledged that the ECB would do whatever it takes to help increase inflation across the euro area.

“For our part, we will continue to meet our responsibility – we will do what we must to raise inflation and inflation expectations as fast as possible, as our price stability mandate requires of us” Draghi said.

“If on its current trajectory our policy is not effective enough to achieve this, or further risks to the inflation outlook materialise, we would step up the pressure and broaden even more the channels through which we intervene, by altering accordingly the size, pace and composition of our purchases” Draghi added.

Traders and investors are hoping for additional monetary stimulus in the form of quantitative easing to be announced by ECB President Mario Draghi to start in 2015.

Unlike the U.S. Federal Reserve, the ECB has not bought bonds outright and instead controls the flow of money through refinancing facilities.

The ECB has conducted long term refinancing operations (LTRO) that is intended to add liquidity to banks and manage the flow of money.

On September 18th the ECB extended their balance sheet to €1 trillion ‘s through its first targeted LTRO or TLTRO to support bank lending to the real economy.

The September TLTRO proved to be major disappointment with only € 82.6 billion being allotted in the 1st of 8 TLTRO’s that will be conducted from September 2014-June 2016.

December 11th will be the 2nd TLRO.

Consensus is for  €267 for both TLRO’s.

Investors are hoping that the disappointing LTRO results from September will press the ECB to go the next step and embark on some type of American and Japanese version of quantitative easing despite resistance from Germany.

But that may not occur until the results from the December 11th LTRO are known.

-Johnathan Schweitzer

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