Friday October 27, 2017 - 17:07:27 GMT
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ECB Cuts Back On Quantitative Ease, As Expected. Markets React Strongly
John M. Bland, MBA
Buy The Rumor; Sell the Fact? There were no major surprises in the closely watched ECB policy decision on Thursday October 26. This was probably the most closely followed ECB decision ever because the ECB has been well behind the Fed and Bank of England in gradually pulling away from aggressive policy accommodation. ECB President Draghi has a market reputation for being a policy dove and forex markets took this ”policy tightening” as not as aggressive as they might have liked. The main focus of the markets was by how much the ECB would reduce its asset purchases (bonds) when the program is renewed at the start of 2018. The ECB left interest rates unchanged and announced that in January 2018 it would reduce its net monthly asset purchases by EUR 30bn from EUR 60bn. This new program will then continue until September 2018. Odds are near certain that the scheme will be further tapered when this extension runs out. They have ample time between now and then to decide what to do at that time.
On the dovish side, the ECB it reiterated that it “stands ready to increase the APP (asset purchase program) in terms of size and/or duration” if required. This gives them leeway to respond to any unexpected reversal of fortunes for the Eurozone economy. The ECB also reiterated that it expects interest rates to “remain at their present levels for an extended period of time, and well past the horizon of the net asset purchases”. This appears to rule out any interest rate increases until well into 2019. Importantly, the central bank indicated that the reinvestment of maturing assets will continue “for an extended period of time after the end of its net asset purchases, and in any case for as long as necessary”. Monthly reinvestments in 2018 are expected to average around EUR10bn.
While noting “unabated” economic growth momentum, providing “growing confidence” in the economy President Draghi indicated that inflation is moving in the direction of the ECB’s goal of “close to, but below, 2%” . However, Draghi said that inflation has yet to show signs of a sustained upward trend. Because of this, further policy stimulus remains necessary for now.
Markets React Strongly The EURUSD reacted strongly to the dovish commentary in the press conference following the decision by the ECB. In his press conference, President Draghi appeared to try to avoid any distress in the markets. EURUSD traded one of its widest daily ranges of the year as it sold off sharply. It appeared to us that traders had become heavily overbought EURUSD in advance of the policy decision and heavy EURUSD selling triggered several rounds of stop-loss liquidations.
Amazing Trader EVENT RISK Calendar:
Sun 29 Oct
00:00 EZ, CH, GB- Clocks fall back one hr.
Mon 30 Oct
Tue 31 Oct
08:00 EZ- flash October HICP
14:00 US- Consumer Confidence
Wed 1 Nov
00:00 All Day- final Mfg PMIs
Thu 2 Nov
12:00 GB- Bank of England Decision
12:30 US- Productivity, Weekly Jobless
Fri 3 Nov
00:00 All Day- Service PMIs
12:30 US/CA- Trade, Employment
Be sure to refer daily Global-View to see the continuously UPDATED Economic Calendar and the Forex Forum for the complete list of key items (actual data, selected charts, etc.) as they are released.
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