If you have been trading currencies, you must have heard a lot about Quantitative Easing (QE) by the FED. Do you know what is Quantitative Easing (QE) and how it affects the currency markets? We are asking this question because European Central Bank is also thinking about starting its own QE program. So you must know how ECB QE program is going to affect EUR/USD and for that matter GBP/USD also.The crux of QE is when the central bank starts buying financial assets especially bonds from the markets by printing money. You can read this Yahoo Finance article that explains in detail what QE is.
You can read this DailyFX article on Quantitative Easing written in 2009 when FED had just started its QE program. Read it and compare what is suggests with what actually happened and see how accurate the predictions were. The major concern at that time was QE will kick in inflation in the US economy. Did inflation kick in? Not really. FED has still not raised the interest rates till now indicating that inflation is not a major concern at this time. What QE did was USD currency pairs started behaving differently. Trends would start all of a sudden without any retracement. Now FED is saying it will end QE soon. Let’s see how the USD pairs behave now when there is no QE.
As far as ECB QE program. There is a big argument that EURO zone is not responsive to low interest rates. This raises questions about the effectiveness of ECB QE program. Speculation is rampant that the European Central Bank will soon begin so-called quantitative easing—large-scale bond purchases intended to pump money into the economy. While most analysts do not expect the E.C.B. to announce such a program on Thursday, the central bank could signal that one is being prepared. QE means low interest rates. It is expected that ECB QE will drive the interest rates very low in Europe. This will make EUR weak and bearish. On the other hand strong US economic recovery will force FED to increase interest rates sooner perhaps in the early part of next year. This makes USD strong and bullish. Expect a strong EUR/USD downtrend as a result of ECB QE. Watch this video also!