It's probably more effective to take significant monetary measures instead of gradual steps. PIMCO believes that the monthly purchase sum will be increased with an amount of 10 billion to 70 billion per month, and that the program will continue until at least March 2017. The refinancing interest rate will be lowered to 0% with 5 base points, and the deposit interest with 10 base points to -0.3%. Something has to be done and something is going to happen, doing nothing is not an option since no one wants a Japanese scenario. Bosomworth warns that there are risks involved if there's going to be more stimulation, like it could lead to financial instability. The stock markets are certainly going to be affected by it, although they are already by the ECB.
How will the Euro be affected?
If indeed this scenario plays out I'm almost certain that the EUR/USD is going to drop even further. But we're there yet. In the short term I see the Euro gaining strength before it will collapse to 1.04 or 1.03 even. Right now I'm long EUR/USD from 1.0591 with 1.0630 in mind, this is because I see some resistance, but midweek to Friday I'm looking for a good entry point to go short. Whatever the case may be, it's going to be a volatile week for the Euro.
+John van der Munnik