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EUR/USD update (30th July 2012, 17:00)

The euro’s correlation with other risky assets broke down this afternoon, with EUR/USD falling 91 pips to $1.2242 by 4pm (London time) despite broad gains in equity markets.

The euro is falling because investors and traders are speculating that the ECB will unveil unconventional measures on Thursday, such as quantitative easing, to help bring down borrowing costs.

ECB president Mario Draghi led the market to believe that more aggressive measures (such as QE) are underway after saying he will do whatever it takes to save the euro, a message that was echoed by French president Francoise Hollande and German chancellor Angela Merkel over the weekend.

Unlike the US, UK and Japan, the ECB has not implemented outright QE yet. The European constitution actually prohibits the expansion of the central bank's balance sheet to finance government spending. The ECB has bought government bonds in the secondary market in the past through its Securities Markets Programme (SMP), which is now dormant, but this was not the same as QE, as the extra liquidity was quickly mopped up through a process called sterilization.


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EUR/USD update (30th July 2012, 17:00)

The euro’s correlation with other risky assets broke down this afternoon, with EUR/USD falling 91 pips to $1.2242 by 4pm (London time) despite broad gains in equity markets.

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