ECB to Re-examine QE in December

The most famous quote market participants associate with Mario Draghi was that the ECB will do “whatever it takes “ to protect the Eurozone. Draghi backed this up by introducing a quantitative easing program that spends €60 billion a month on assets and will do up until September 2016, he also lowered the benchmark rate to 0.05% and introduced negative deposit rates.

Did Draghi make another monumental statement at yesterday’s ECB meeting? So when Mario Draghi provided a strong signal at yesterday’s ECB meeting that they are prepared to expand its bond buying program and potentially cut it’s already negative deposit rate the market reacted.

EURUSD past 2 days

Source: Bloomberg Source: Bloomberg

 

Policymakers are set to make their judgement on whether adequate stimulus is being provided when they next convene on 03-Dec-15. Further interest rate cuts and/or an expansion of the ECB’s EUR1.1 trillion bond-buying program, either by upping the pace of purchases or extending it beyond September 2016 would certainly provide Euro bears with a treat just in time for Christmas. To be frank the ECB and Draghi couldn’t have provided a stronger signal in my view that additional policy is on the cards for December with Draghi explicitly stating that ‘this is not a wait and see but a work and assess.’

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So for me it’s clear “SELL THE EURO” for now, with an initial move in EURUSD to 1.1075, followed by 1.0840 and ultimately 1.0525 as target levels between now and year end.

Adding further weight to my expectation of a move lower in EURUSD comes from the USD side of the currency pair. Recent data has started to contradict the recent soft payroll numbers (US unemployment data), with yesterday’s initial jobless claims four-week moving average dropping 2,000 to the lowest level since 1973, at 263,250.

The next non-farm payrolls release on 06-Nov-15 is certainly going to be pivotal in providing clarity around the true state of the US unemployment picture. If the trend in the initial jobless claims is anything to go by and the markets gets its recovery in the US unemployment picture, the USD could be a significant factor in driving the EURUSD lower in the short term and may even put the prospect of a year-end rate hike back on the cards in the US!

For now, Draghi has put the Euro bulls on the side-lines and prevented any near term move higher in the single currency; the market must now monitor the economic data on both sides of the Atlantic and wait to see the extent of the Christmas present the ECB delivers on 03-Dec-15.

EURUSD YTD performance

Source: Bloomberg Source: Bloomberg

 

 

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