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EUR: ECB policy meeting account indicates growing worries - MUFG

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Nov 20, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Delhi) – Derek Halpenny, European Head of GMR, notes that the markets are lacking momentum at present with market participants fully anticipating a policy easing by the ECB on 3rd December followed by a rate increase by the FOMC on 16th December.

    Key Quotes

    “On looking at the account of the policy meeting that took place on 22nd October, which was released yesterday, it is clear that the ECB appears to know the importance of acting forcefully in order to communicate strongly to the market that the Governing Council is determined to act to achieve its inflation mandate.”

    “The most telling aspect of that meeting was the view expressed by some that “the present communication already catered for the possibility of extending the program beyond September 2016”. In other words when discussing potential policy options it would appear that the Council may view merely extending the QE program as something already communicated and therefore would not really be a new policy announcement. This suggests to us that an increase in the pace of asset purchases under the QE program is now more likely than not.”

    “So we believe the ECB may announce three elements to changes in the policy stance – an extension in QE to at least March 2017, an increase in the total purchase amount from the current average monthly pace of EUR 60bn to perhaps EUR 80bn, and finally a cut in the deposit rate by 10bps to -0.30%. Then of course there is a fourth element – communication!”

    “We now expect very aggressive action from the ECB on 3rd December. While this is largely anticipated we believe it would be wise to assume the current lack of downward momentum in EUR/USD presently means “it’s all priced” and therefore euro will not go lower on confirmation of action. We believe it is very understandable that market participants may be currently cautious on adding to positioning ahead of these key central bank announcements – but confirmation of expectations can still act as a trigger for further divergence trades to be established.”

    “Finally, we are somewhat sceptical of this growing view in the markets of a “dovish rate hike” by the FOMC on 16th December. Is this possible? The FOMC minutes released yesterday were supposedly dovish but the dollar is rebounding today in response to 2-year yields in the US hitting new highs. While communication tools can help (lowering of the DOTS; lowering of long-term neutral fed funds rate) the act of tightening will remain the key influence and will surely put further upward pressure on short-term yields. Put another way, we feel Draghi will have an easier time with dovish communication following ECB action on 3rd December than Chair Yellen will have after raising interest rates!”
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