The key updates
- Monthly asset purchases tapered to 30bn euros from January
- QE program extended until September 2018
- Interest rates unchanged
- Interest rate guidance: to stay low ‘well past’ QE
- Draghi jawbones the euro lower
Consensus not hawkish
Some deviation from consensus opinion would have been needed for a more bullish response to the ECB tapering decision. The ECB will enact the base case scenario, which had been leaked beforehand by ECB sources. Namely, asset purchases would be extended for nine months but tapered from $60bn per month to $30bn per month.
Rates guidance
The dovish guidance that rates will stay low ‘well past’ QE suggests to us a rate hike in the latter half of 2019, if at all. The ECB is keeping its optionality in case the outlook worsens. Euro bulls needed a clear signal that negative rates are coming to an end, and they didn’t get it. By keeping the guidance for rate practically unchanged, Draghi may have put a temporary ceiling on the euro at 1.20.
The future of QE
In his statement President Draghi said that if the economic outlook worsens, the governing council can increase QE in size and/or duration. We are sceptical that the scarcity of bonds would allow much of an increase in the size and duration of QE beyond the newly announced extension. This is one reason that over the medium term, we think the euro has further room for appreciation.
Inflation and growth imply low rates
The ECB is walking a tightrope of improving eurozone economic fundamentals with below-target inflation. Moving forward the ECB has said inflation lacks signs of a sustained upward trend. Rates will remain below their long term average while the market shares this view. The ECB is essentially taking credit for the stronger growth in the eurozone. The governing council is of the belief that the economic recovery is not self-sustaining and still needs an ‘ample degree’ of monetary stimulus.
Jawboning the euro
Mario Draghi repeated his phrase from the last meeting that developments in FX markets are a downside risk. The ECB see the euro above 1.20 as a risk to meeting their inflation target. It would appear to us that the ECB is uncomfortable with the euro above 1.20 and is adjusting its guidance accordingly. The ECB talking the euro lower and signs of a resurgence in the dollar suggest EURUSD will remain under pressure. If 1.17 gives way, we see a further correction to 1.15.
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