Currency traders are betting that EUR/USD will continue to fall if ECB tries to boost inflation. Since May, currency traders have been taking bearish bets on EUR/USD. They think with the economic situation worsening in EURO zone and US economy doing good, EUR/USD will continue to fall. FED is expected to raise the interest rates early next year. When this happens, it will make USD an attractive currency. On the other hand, ECB has started it’s own version of QE. This requires keep the interest rates very low. If ECB keeps the interest rates low, it will make EURO as unattractive and USD as even more attractive. The result will be money will flow from EURO zone to US. This will further make EUR/USD fall.
The Fed is winding down its bond purchases, and is expected to raise interest rates next year, which increases the dollar’s appeal. Meantime, Europe’s economy is showing signs of backsliding. Italy slipped into recession in the second quarter, data showed in August. Annual inflation fell to 0.4% in July, well below the ECB’s target of around 2%.
Investors watching the worsening economic picture have been streaming into bearish euro bets since May, predicting the ECB would be forced into action. At its June meeting, the central bank introduced negative rates on some deposits. Mr. Draghi’s speech at Jackson Hole hinted at more drastic steps to come.
Currency traders who have taken a bearish bet have been further emboldened by Mario Draghi’s speech at Jackson Hole.