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Analysts originally expected an announcement in August. But it took until today for the ECB to reveal a taper package which surprised no one.

We’ve now got some certainty from the European Central Bank (ECB) - at least as far as the next 11 months are concerned. Earlier today the ECB’s Governing Council said that it was extending its bond purchase programme by nine months from December, taking it up to September 2018. It also said that it would reduce its monthly purchases to €30 billion from January next year - down from €60 billion currently. Crucially, the ECB said that it reserves the right to extend the programme beyond 2018 should conditions warrant further stimulus. The Governing Council left all its key interest rates unchanged.

This was exactly in line with the consensus market expectation, although there had been some concerns that the central bank may signal a final end date for its bond purchases. The worry was that in doing so investors would immediately home in on when the ECB was likely to start raising its key interest rates. The Governing Council had said previously that it wouldn’t start to hike its Minimum Bid Rate off the current zero-bound until it had completed its programme of quantitative easing and Mario Draghi confirmed that again today. The ECB President said that key rates would continue to be on hold for an extended period of time and “well past” the horizon of asset purchases. Ahead of the meeting the market was pricing in a rise of 10 basis points in the first quarter of 2019 and the first full 25 basis point hike sometime in early 2020. This appears to remain the case. Today’s message was that the ECB will soon begin to tighten monetary policy, but at a slow and considered pace. Mr Draghi emphasised that the Asset Purchase Programme (APP) could be extended in both size and duration should the ECB deem that this is warranted by market conditions. This helped to dispel concerns that the ECB could signal a definite end-date to its APP. It was perhaps this more than anything else in today’s meeting that led to a sharp sell-off in the euro.

So far it looks as if the ECB have made the first move in removing stimulus while preventing the euro from rallying. This is precisely what they wanted. It is common knowledge that the central bank wants a weaker currency. Not only does that help exporters, but it will also help to boost inflation at some point. As usual, inflation remains a big worry for the ECB. The bank’s current projections are that Euro zone inflation (as measured by the Harmonised Index of Consumer Prices (HICP)) will come in at +1.5% this year, then dip to 1.2% in 2018 before picking up again in 2019 to 1.5%. All-in-all, it looks as if it could be many years before the HICP approaches the ECB’s target of “just below” 2%. Consequently, the ECB will be hoping that their actions today will prevent the euro from running away with itself and the EURUSD should continue to hold below resistance around the 1.2000 mark.

This first (five minute) chart shows the sell-off in the EURUSD following the release of the ECB’s statement:

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The daily chart below shows the rally since the beginning of this year. As we can see, the EURUSD formed a neat little head-and-shoulders pattern between August and September. Now we can see the euro approaching support around 1.1680/1.1700. Not only have we seen the euro bounce off here on a couple of occasions this year, but 1.1680 also marks the 23.6% Fibonacci Retracement of the January-to-September EURUSD rally. Today’s ECB meeting has seen the pair head back towards support. This big question now is whether it will hold or not. 

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Posted by David Morrison

Tagged: Dollar USD ECB forex EURUSD

Category: PM Bulletin


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