News & Analysis

Europe’s Bond-Buying Program

September 7, 2017

The European Central Bank (ECB) engaged into a €2 trillion bond buying program to promote economic growth and drive inflation up in the Eurozone.
It involves buying assets from commercial banks to inject more funds in the banking system. It is a non-standard monetary policy commonly referred as quantitative easing (QE).
The market expected the QE to be phased out by the end of this year. Key ECB policymakers are expressing concerns over a strong Euro which is putting months of challenging work into jeopardy.
A strong Euro will directly hurt Germany, one of the largest economy in the Eurozone, as higher export costs will translate into lower demand. On the other hand, the Pound will eventually benefit from it as euro buyers could switch to pound.
The exchange rate has therefore become an issue as ECB is unable to maintain the desired inflation rate. Given the concerns over the strong euro, the market foresees that ECB is less likely to exit from the QE phase.
After more than 2-year high, the EURUSD dropped. The selloff was also due to strong economic US data during the week and the comeback of the tax reforms talks in the White House.