Volatility in euro markets rose last week on media reports, that the
ECB may be discussing tapering its asset purchase program, scheduled to
end in March 2017. However, such speculation was quickly denied by Vice
President Vitor Constancio. The ECB’s communication this week, including
speeches by ECB’s Mersch (Tuesday, Wednesday) and Coeure (Wednesday)
will likely also attempt to curb speculation of premature tapering. A unified message regarding the ECB’s ability to continue easing should keep EURUSD in check, in our view. We continue to envision EURUSD at 1.08 by year-end.
The accounts of the GC meeting released last week offer some comfort
to our view that the ECB will announce changes to the technical
parameters and an extension of QE beyond March 2017, at its December
meeting (see ECB minutes: Monetary support still warranted, 6 October
2016). At this stage, we think changes to the size or composition of the
PSPP are unlikely before March 2017 and in any case with related
communication that reassures markets that policy will remain
accommodative for the foreseeable future (see ECB Watching: Reducing QE is not tapering).
other words, the ECB faces a communications challenge that will be
crucial for the future path of the EUR and euro area rates. The
challenge is essentially to succeed where the Fed did not during the
Taper Tantrum, by convincing markets that a slower pace of balance sheet
expansion is still stimulatory.