The European Central Bank is about to embark on a slow-down of its bond-purchasing programme. The bank currently buys €60 billion bonds per month, which may decline to €30 – €20 billion in 2018. This allows the ECB to continue to buy bonds throughout next year, leaving the cost of borrowing steady until 2019.
Policymakers want to curtail the noise in markets and smoothly transition out of the easy-money programme.
Although, one of the main concerns of ECB president Mario Draghi, is the prospect of an inflated euro as modest tapering develops. A stronger euro would infringe upon the need for higher inflation, threatening the disposable incomes of European consumers and earning power of exporters.
The euro has added 12.4% this year against its US counterpart, making the single currency a stand out performer of 2017.
Thursday’s ECB conference will perhaps give some insight into the short-term path of the euro, as investors mull over the direction of monetary policy.
If Draghi proves to be more dovish in his analysis, an increase for interest rates could be postponed, leaving the euro to dwindle.
The eurozone’s recovery has been robust, supporting the single currency over the past year. However, the stronger euro limits the ECB’s options when it comes to tapering. The median range of $1.18 is not high enough to derail the region’s economic recovery.
The stronger euro will instead hinder the bloc’s ability to reach its inflation target of just under 2%. Core inflation has reached 1.1% for September, while forecasts remain weak in the long run, with asset price stimulation expected to come in at 1.15% in 2019.
However, these forecasts are based on the euro trading at $1.18, a stronger valuation for the single currency would mean a downward revision to inflation would be necessary.
Finally, the euro’s future will be heavily influenced by the Federal Reserve and US tax reform. Donald Trump is expected to choose the next Fed chair by the 3rd of November and the president is rumoured to favour a more hawkish Fed leader.