Global Macro: Diverging Policy Bearish for the Euro

TheStreet.com

NEW YORK (TheStreet) -- The euro has tumbled in recent weeks as policy expectations have diverged in the U.S. and Europe.

The European Central Bank meets on Thursday to discuss monetary policy, with discussions revolving around weaker inflation.

Last week inflation readings for the European region came in well below the 2% target. This led many to speculate the ECB will be forced to take action in order to stimulate economic activity.

Although the central bank is unlikely to cut rates at Thursday's meeting, some form of action is expected in the future if inflation remains tepid.

Meanwhile, in the United States, investors have begun to fear that the Federal Reserve has hawkish plans for the future.

The language used at last Wednesday's October Fed meeting caused investors to believe stimulus may be reined in sooner than expected. This resulted in bonds selling and the dollar rallying over the past few sessions.

Tuesday's strong ISM numbers signaled that a stronger economy similarly justifies Fed tapering. Equities sold off soon after the data were released.

The chart below is of the CurrencyShares Euro Trust .

The euro has come under heavy selling pressure as investors have preferred to own the dollar versus the euro due to diverging policy expectations.

The euro remains weak, and U.S. interest rates continue to rise. This may change if important U.S. data due out later in the week come in worse than expected, or if the ECB takes a more hawkish tone at its meeting on Thursday.

If little changes after these events, expect the euro to remain under pressure, with downside support being at its September lows.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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