EUR/USD Price Chart, European Stocks – Talking Points
- EUR/USD may fall if Fed rate cut bets are amplified by growing fundamental risks
- European stocks, US equity markets may get boost from hopes of liquidity injection
- Euro traders anxiously waiting for ECB rate decision, last Mario Draghi briefing
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The Euro may rise alongside European stocks if US Fed rate cut bets are amplified and leave investors buoyant from the prospect of future easing measures. In the face of eroding fundamentals from geopolitical risks and trade wars, markets have begun to heavily lean on liquidity injections from central banks. However, policymakers are becoming concerned that this could create unstable credit bubbles in financial markets.
The ECB will be announcing its rate decision this week, though policymakers have said they will not likely cut rates for the next few months. This comes after the central bank in September cut rates further into negative territory by 10 basis points from -0.40 percent to -0.50 percent and reintroduced QE. These policies were introduced as a way to stimulate what continues to be an ailing economy amid a global economic slowdown.
Therefore, if interest rates remain persistently low, investors may continue to take advantage of cheap credit and use to inflate equity markets. Indices like the Euro Stoxx 50 and DAX are both up a little over 20 percent year-to-date largely as a result of these policy measures. If they were based on the underlying fundamentals, equity markets would be showing far softer returns than they are now.
Meanwhile, the Euro and regional bonds continue to dive into negative territory in anticipation of future rate cuts. The coupon rate on a 10-year German bund is hovering at -0.34 percent, while the global market for negative-yielding bond yields is currently over $14,000,000,000,000. The divergence between the rise of equity markets and decline in bond yields hints that harder and more volatile times may not be too far off.
Chart of the Day: Eurozone Government Bond Yields Plummet, Equities Soar
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--- Written by Dimitri Zabelin, Jr Currency Analyst for DailyFX.com
To contact Dimitri, use the comments section below or @ZabelinDimitri on Twitter
