It has been widely argued that the Euro should be lower relative to the dollar. However, it seems to have taken a deflation scare to finally take the Euro lower as monetary easing looks more and more likely from the ECB. Mario Draghi, the ECB’s chief, has stated that he will use all available tools if inflation falls lower. July’s inflation for the Eurozone was a paltry 0.4%, much lower than the 2% target.
Weaker data out of Germany, and political turmoil in France suggest weakness could continue leaving the ECB no other choice but to take action. Further, we are starting to see a clear shift in stances between central banks. The Fed has already began to pull back stimulus and there is a growing possibility that rates could rise earlier than expected next year due to economic strength. However, the Eurozone is still in the early innings of their recovery, and the ECB is likely to have to take a more aggressive role to protect the region from slipping back into recession.
With the ECB and Fed heading in opposite directions from a monetary policy standpoint, this could be the dynamic to lead the Euro into a new downtrend. This is important to consider for anyone invested in Europe. As I’ve mentioned in a previous post, “Currency Effects”, currency can help or hurt when investing internationally; so it is important to consider getting ahead of a trend and protecting your portfolio when it’s likely the currency trend is to the downside.