Euro Drops as Policy Divergence Takes Center Stage

Euro is heading lower today, falling against the sterling and greenback as policy divergence comes into play. Euro is still higher against the yen, but with expectations for higher rates in the United States and the United Kingdom, the 19-nation currency is falling behind.

Even though the data out of the eurozone was reasonably encouraging this week, leaders are still far from ready to start changing policy in the 19-nation currency zone. With the ECB still likely to maintain a policy of quantitative easing, there isn’t a whole lot for the euro to go on in terms of strength.
On the other hand, Janet Yellen has indicated that there is a good chance that the Federal Reserve will raise rates in 2015, rather than waiting until early next year. Many analysts expect the Bank of England to raise its rate soon after the Fed rate moves higher.
With the prospect of such policy divergence, it’s no surprise that the euro is losing ground to both the dollar and the pound. The euro can’t keep up with those policy moves and will likely see some short- to medium-term weakness.
At 13:53 GMT EUR/USD is down to 1.1175 from the open at 1.1229. EUR/GBP is also lower, dropping to 0.7354 from the open at 0.7367. EUR/JPY is higher, gaining to 134.8580 from the open at 134.8420.

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