THE surprise for the eurozone last week wasn’t the unveiling of a quantitative easing programme by the European Central Bank. What was surprising was the scale of the programme, at €60bn (£44.8bn) per month for the next 19 months. This huge announcement caused the euro to nosedive and, in combination with the divergence between the ECB’s monetary policy and that of other major countries, will likely continue to weigh on the single currency over the next year.
Still, once the dust settles, the markets may start to see QE as a positive. The programme demonstrates that the ECB remains fully committed to battling deflation. For this reason, it wouldn’t be a surprise to see pockets of support for the euro over the next few weeks.
The recent Greek elections are also piling pressure on the single currency. With the election of left-wing party Syriza on Sunday, there are growing fears that the Greek bail-out programme will fall away in the near future, with a confrontation between Greece and the ECB. These fears for the bail-out programme have set euro investors on edge. The single currency fell to an 11-year low following the election, but recovered slightly after the event. If discussions deteriorate further, however, we can expect the euro to be under pressure for some time yet.
Of course, it’s not just the euro that’s under threat at the moment. The risk of deflation isn’t just a problem confined to the eurozone. With recent sharp declines in the prices of oil, energy and broader commodities, as well as uncertainty around growth prospects for China, the outlook for inflation in countries such as Australia and Canada is worrying. So worrying, in fact, that the Bank of Canada recently cut interest rates and downgraded growth and inflation forecasts.
Although employment numbers from the US have picked up during the last year, this global inflation issue might mean a US rate hike is brought in to question sooner rather than later.
Alex Edwards is head of the corporate desk at UKForex, part of the OzForex group