Forex trading - EURUSD lower after ECB announces dovish taper

‘This is not tapering, it’s downsizing’. Mario Draghi left his best line till last, scorning those of who describe the reduction in net asset purchases as a taper. This was an incredibly well telegraphed decision and despite what the ECB president says we can call it a ‘dovish taper’.  The ECB will be in the market for a long time to come.

The market response has been a softer euro and a slide in bond yields. With the Fed looking more hawkish (no more Yellen?) and US Treasury yields pushing higher we might at last be seeing the market take the Fed seriously on more rate hikes, and combined with the more dovish ECB could spark a reversal in the EURUSD rally seen in 2017.

Of note, we know for sure that QE will continue beyond September 2018 with Draghi saying the programme will not ‘stop suddenly’. Moreover there appeared little sense that if conditions were to improve significantly that the ECB would seek to exit any sooner.

On the whole Draghi has got his way, signalling the start of the great unwind without upsetting markets. He was able to confidently note that the central bank’s communication has been ‘effective’.

The ECB can continue to take baby steps but come next summer, if growth continues to improve and inflation picks up, the pressure to exit QE sooner will be intense. For now Draghi can be pleased with a can kicked successfully down the road. A taper without a tantrum.

Key points summary and notes:

ECB will continue QE at a monthly pace of €30 billion until the end of September 2018, or longer if necessary. Extending asset purchases for nine months and cutting the rate to €30bn a month is pretty much bang in the mid-point of market expectations and should ruffle few feathers. As anticipated extending the duration of asset purchases at the expense of buying less each month means it can push back expectations for when rates will rise

ECB stands ready to increase size and/or duration of QE if necessary. Some question marks over the credibility of this given the looming bond scarcity problem.

No chances of QE ending in September 2018– Draghi maintained that there will not be an abrupt end to bond buying. Draghi said ‘It’s not going to stop suddenly’. This indicates that QE will continue until the end of 2018 and possible into 2019, which leaves a rate hike even further away, perhaps not until 2020

ECB will remain the market for a long time yet – plans to reinvest the principal payments from maturing securities purchased under QE in the month they mature for an extended period of time after the end of the programme. Draghi said the reinvestment would be ‘massive’

Interest rates will remain at rock bottom ‘well past’ the end of QE

Growing confidence inflation will converge with target but price pressures still muted and outlook and path of inflation remain conditional on continued monetary policy support

Measures of underlying inflation have picked up but yet to show convincing sign of more upward trend. Domestic cost pressures are subdued overall

Underlying inflation to rise gradually but support by monetary policy measures – outlook on inflation unchanged with ECB looking at 1.2% in 2018, 1.5% in 2019.

Economic expansion solid and broad based. Unabated growth momentum in second half. Risks to growth are broadly balanced – no change from September

Structural reforms need to be substantially stepped up. Copy and paste from every single meeting

Decision wasn't unanimous – hardly a surprise given how some hawks would like to an appreciably faster exit from QE

Composition of QE buying was not discussed – so no word on potentially scaling back Govvies in favour of greater weighting of corporate bonds. However Draghi said the ECB will continue to purchase ‘sizable quantities’ of corporate bonds – a signal that sovereign debt may get more of a haircut because of the well-known scarcity of those bonds

Greater emphasis on stock of assets – the more the programme increases in size the more the stock of bonds matters in comparison to the flow of bonds

On Catalonia – too early to say if it poses financial stability risks to Spain and Eurozone. But ECB is paying attention to what’s going on. Draghi said it did not increase purchase of Spanish debt to help ease pressures

 

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