Mario Draghi´s letter to MEP´s reiterated the ECB´s intention to enlarge its balance sheet by €1 trillion, noting that the bank´s governing council was “unanimous in its commitment to using additional unconventional instruments within its mandate.” The letter went on to note that “Such measures may entail the purchase of a variety of assets-one of which could be sovereign bonds.”
The plummeting oil price, low inflation and continued speculation surrounding the scope of the ECB´s QE measures have pushed the euro to its lowest level since December 2005. The single currency saw a dramatic fall in the second half of 2014, having hit a high of $1.39070 in March. The ending of the final round of QE by the US Fed added to pressure on the single currency in the latter half of the year.
Alan McQuaid, economist at Merrion Capital notes that the euro may have further to fall in the short term.
“We are expecting the ECB to announce sovereign bond purchases in the first quarter of the year, so you could see a further drop in the euro down to $1.10-$1.15 range in the first half of the year.”
Mr. McQuaid estimates that such a fall is likely to be followed to a rebound in the second half of the year.
“The euro zone is running a trade surplus, while the US is running a deficit. That is something that is closely tied in with the value of a currency. So I would anticipate that the dollar might weaken, with the euro getting back to about $1.20 in the second half of the year.”
Central banking sources confirmed to The Corner that they do not expect the ECB to make any further quantitative easing move before the Greek elections on Jan25. Different plans are being considered, such as a risk-sharing mix initiative, according to Reuters, but no action on sovereign bonds purchases is expected before the outcome of the Hellenic polls is known.