European Central Bank cuts forecast, euro exchange rate gets affected

A bunch of forecasts for new year

This week of Dec. 10-14 brought a few of vital decisions from central banks of different countries. The Norwegian central bank kept its policy unchanged, so did the Swiss National Bank. However, the Swiss institution has cut forecast for inflation in 2019. Also, its President Thomas Jordan sees a space for easing policy, if there is such need. The European Central Bank made the boldest moves by decreasing both the economic growth and inflation outlooks for next year. Even though the reduction was not significant, the move underlines the bank’s concerns about the eurozone economy as the bond-buying program comes to an end. ECB has scrapped its support scheme that saw it purchasing bonds that added EUR 2.6 trillion to its balance sheet during last four years. Experts don’t expect the ECB to extend QE policy into next year, however it will remain an option that can be used when needed, especially if the objective of maintaining inflation below 2 percent becomes threatened. In such case, the ECB might revise its instruments and even come back to QE program, that is part of its tool box, as the President Mario Draghi puts it.

Draghi says it gets worse

Apart from stating that QE might be reused over medium term if needed, Draghi provided some concerning comments on the European economy, after ECB cut the forecast for eurozone economic growth. The President claimed the economy is getting worse in the 19-nation zone. While talking to reporters in Frankfurt, Draghi said risks are “broadly balanced”, but “moving downside”. For that he put blame on geopolitics issues, market volatility and trade protectionism. These are significantly hawkish comments from Draghi, in style that has not been heard in a long time. No surprise investors reacted hugely to worsening economy’s forecast and comments.

The common currency reacts

Investors reaction was to sell euros. On Friday morning the euro fell 0.4 percent against the US dollar to $1.1308. The common currency suffers only blows, without any good news that could trigger its better exchange rate. Ongoing Brexit struggle is not helping either. Whereas the US dollar was on the rise not only when compared to the euro, but also against other currencies. As the euro and the British pound find themselves struggling over politics turmoil, the US dollar receives support. However, some more violent changes are only expected to come which also can affect the Euro Swiss Franc exchange rate.

Waiting for FED’s decision

On 18-19 December there will be held the Federal Reserve’s meeting. Market analysts widely expect the main financial institution of the USA to hike interest rates yet again this year and give guidance on 2019 policy. These decisions could be a catalyst for some bigger moves when it comes to the dollar euro exchange rate. If, as expected, FED will raise interest rates for fourth time this year, the US dollar might get further support and the euro will find itself in hot water again. At the moment it is difficult to predict the influence of such a move on the EUR CHF exchange rate.

As many of our customers are frontaliers we track closely the developments of all events that could affect the Euro Swiss Franc exchange rate. Please use our currency converter at exchangemarket.ch to check the current euro franc exchange rate and to compare the exchange rates in banks.