The Fed’s stall adds to the case for another burst of European QE

On Thursday the Federal Reserve chose not to increase interest rates, and a lot of people thought the US central bank was more dovish than expected, with concerns about the dollar, unemployment and emerging market growth.

Most analysts still seem to think that December or early next year is most likely for the first rise since the 2008 financial crisis.

But what happens in Washington doesn’t stay in Washington.

It has ramifications around the world, including in Europe. The dollar is a global currency, and the European Central Bank isn’t immune to the Fed’s decisions.

The stronger dollar is generally something that the ECB wants, even if it doesn’t say it out loud. A strong dollar (and a weak euro) means European goods are less expensive to American customers, and eurozone exporters are boosted.

A rate hike from the Fed would generally strengthen the dollar — that’s actually one of the reasons that the Fed seems to be holding off.

There’s a bit of a divide in opinion on what comes next. HSBC analysts think there’s nothing new here for the ECB: “ECB policy is on auto-pilot so any lasting move in EUR-USD would be driven by the US side of the equation. Today’s outcome leaves that equation unchanged.”

But in a note send out after the Fed decision, BNP Paribas analysts argued that it adds to the case for more easing: “In Europe, the implication of the Fed’s unchanged rate is to increase our conviction that the ECB will increase its QE.”

The ECB announced QE in January, going for a bigger programme than most analysts expected. They have left the door open to do more, pledging to follow the bond purchases through until at least September next year, and longer if necessary.

Earlier in the year a lot of analysts were even talking about the dollar going to parity with the euro, a 1:1 ratio, by the end of this year. But that’s been looking less and less likely in recent months:


The euro dropped to below $US1.05 in March, from over $US1.35 a year earlier, but it’s since strengthened. It’s now sitting at just below $US1.15, up from $US1.13 before the Fed decision yesterday.

So if the Fed won’t hike, the ECB may see some extra value in easing further. They have got plenty of reasons already. Unemployment is over 10%, twice as high in parts of southern Europe, inflation is nowhere to be seen and growth is better than it was last year, but hardly impressive.

The Fed’s decision won’t be anything like enough on its own to prod the ECB into another round of QE. But for those on the inside of the central bank making the case for more, it’s another point in their favour.

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