15.10.201901:51 Forex Analysis & Reviews: QE program - a mine for the dollar and a chance for the euro?

At the end of last week, the market was excited by the decision of the US Federal Reserve. According to the regulator, from October 15, that is, from tomorrow, it will begin to buy short-term Treasury bonds worth $ 60 billion per month. Many experts believe that the implementation of this strategy will lead to a weakening of the US currency.

The urgency of the situation is given by the statement of the Federal Reserve that this measure is not a quantitative easing program (QE). A number of analysts do not agree with this, since all signs point to the opposite. It is expected that operations will last until the end of the second quarter of 2020, and their total volume will be $ 510 billion. At the same time, the Fed intends to reinvest in treasury bonds the proceeds from mortgage-backed securities that it keeps on its balance sheet. According to experts, this will add an additional $ 20 billion per month to purchases.

As a result, the following picture emerges: the regulator will monthly "pump" the market with liquidity of $ 80 billion, of which $ 60 billion is a direct cash issue. Experts call this process "patching the holes" liquidity. They are sure that the essence of this strategy is the launch of a printing press, since the market constantly needs a dollar supply. On the other hand, currency experts at Goldman Sachs, the largest bank, believe that in connection with the gigantic US government debt placements worth about a trillion dollars, an extension of QE should be expected annually. The repurchase of bonds may continue until at least the end of 2022, the bank said.

According to experts, the actions of the Federal Reserve were aimed at weakening the American currency. Some analysts believe that the de facto regulator follows the wishes of U.S. President Donald Trump, who called on the Fed to devalue the national currency and lower interest rates to zero back in May 2019.

Most currency strategists are confident that the Fed's current policy, which is similar to QE and is not considered to be such, carries significant risks for the US currency. Such a "non-QE" may become a time bomb for the US dollar, and the blast waves from this process will hurt the US economy, experts say. Although, there is an opposite opinion that the new QE can beneficially affect all financial assets.

However, a strong dollar also carries risks for the global economy. First, in addition to the protracted US trade conflict with China, it threatens the development of a currency war with other states. Secondly, the further strengthening of the American currency provokes harsh criticism of the Fed from the administration of Donald Trump and undermines the confidence of the markets in the Central Bank. Thirdly, a strong dollar can destabilize emerging markets with large differences in exchange rates. After analyzing the current state of affairs, the Fed decided to take a course on the weakening of the national currency, analysts summarize.

Many market participants are confident that the fall of the dollar will inevitably lead to the strengthening of other world currencies. Experts warn against this error, urging to carefully analyze the situation in the financial market. When considering the EUR / USD pair, it turns out that the weakening of the American currency does not always lead to a strengthening of the European one. For example, to further strengthen the euro, sustained growth in the European economy and a strong regulator position are required. However, a month ago, the ECB lowered the rate to a new historic low (-0.5%), while launching a quantitative easing program worth 20 billion euros per month. The problems of Europe are complicated by geopolitics, in particular the issue of the "hard" Brexit, which is becoming more and more real. This could hit both the British pound and the euro, analysts emphasize.

Currently, experts recorded the strengthening of the "European" to a three-week high in the pair EUR / USD. This was facilitated by an increase in appetite for risky assets. At the moment, the pair is trading in the range of 1.1034–1.1036. An hour earlier, the values did not exceed 1.1020–1.1023. Experts are sure that the key level for the EUR / USD pair will be the value of 1.1050. The breakdown of this level suggests a further increase to 1.1160. Taking into account current factors, experts expect the EUR / USD pair to recover, where the euro plays the role of the "first violin". Another short-term goal after taking the level of 1.1160 may be a record level of 1.1300, analysts summarize.