EUR/USD Weakens on Speculation Over Third Round of Quantitative Easing
The euro traded lower against the US dollar on Monday sessions, although investors continued to support demand for the single currency in the wake of recent forex news regarding details of the European Central Bank’s bond buying program. The EUR/USD hit 1.2770 at Monday US trading before consolidating at 1.2795. Analysts believed that the currency pair would find its support level at 1.2625, which was also its low at Friday trading, and the near-term resistance level at 1.2816, which was the highest it reached at Friday trading.
The details of the ECB’s much-anticipated bond buying program, which were released last week, delighted the markets and supported demand for the euro. Outright Monetary Transactions, as the program is formally called, provided for unlimited buying of bonds with three-year or less maturities in the secondary markets. The program is aimed at troubled Eurozone economies like Spain and Italy, which are suffering from cripplingly-high costs of borrowing, in order to help them deal with their debt burdens. However, the program is only available to countries that officially request help and agree to implement fiscal reforms in order to free more money to service their debts, which generally involve painful public sector spending cuts.
However, investors trading the euro are likely to exhibit caution until forex news of the Federal Constitutional Court in Karlsruhe, Germany, releases its decision on the constitutionality of the European Stability Mechanism on September 12. The €500 billion bailout fund has already been approved by both Houses of Parliament in Germany but its constitutionality is being challenged by a coalition of political groups, academics and lawmakers, who believe that the Mechanism undermines democratic rule in the country by transferring decision-making power from German lawmakers to Brussels, which is considered the de facto capital of the EU.
Meanwhile, the US dollar remained under pressure as traders anticipated the possibility that the US Fed would implement a third round of quantitative easing in the wake of disappointing US forex news on the labor market. Data from the US Department of Labor showed that the economy added just 96,000 jobs in August from a revised increase of 141,000 jobs in July. Market expectation was that the economy would add 125,000 to 130,000 jobs during the period. The biggest contributor to the US jobs decline was the fall in factory jobs, which was the steepest decline in two years. The data showed that factory payrolls fell by 15,000 workers even as the workweek recorded fewer hours and the number of industries taking on new employees fell to the lowest level in close to three years.
Forex news of a third round of QE was also seen by analysts to support riskier currencies like the Australian dollar. More easing would make it more appealing for investors to use the dollar in carry trades to buy higher-yielding assets. Under QE, the Fed prints additional dollars to buy bonds, which causes Treasury yields to decline and investors to seek higher yields in other markets. When the money supply increases, the value of the dollar is eroded.
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