2 graphs on how the Fed is helping the Euro Area

Fed’s decision on Wednesday to keep a strict monetary policy will help the euro area. It will extend the monetary policy divergence between the Fed and the ECB and this will drive down the European currency.
Since last summer, that’s what was observed. A very accommodative and credible monetary policy for an extended period on the ECB side and an expected change on Fed’s side circa summer 2015. (before of after the summer 2015 is not important here). This divergence led to a lower euro.
Things changed on October the 15th. Gloomy expectations on the world economy have suggested that the Fed could postpone the change in its monetary policy. US short-term forward rates went down rapidly and the Euro depreciation stopped immediately. The shock was temporary but strong (we remember that during  that day the 10 year TBond rate dropped almost to 1.8%). Continue reading