EUR/USD: There were a number of key elements of yesterday’s announcement that make this a more dovish event than expected that we believe reinforces the downside risks for EUR/USD and that keep our forecast of a breach of parity in H1 2017 in play.
Firstly, the larger overall size – EUR 540bn versus EUR 480bn expected of new asset purchases. Secondly,
the much more subdued assessment of the inflation outlook revealed in
the updated inflation forecasts. While the 2017 forecast was raised from
1.2% to 1.3%, the 2018 forecast was cut from 1.6% to 1.5%. The first
2019 forecast was put at 1.7%, still below the official inflation
target. Draghi himself acknowledged worryingly that he saw no difference
in the inflation outlook today compared to when QE began in January
2015. Thirdly, the
scrapping of the self-imposed ban on buying securities yielding less
than the deposit rate of -0.4% has removed an effective lower bound from
short-term securities. Changes to collateral rules in regard to the
PSPP lending securities program will also reinforce downward pressure on
short-term yields through an improvement in liquidity conditions.
So this is a ‘taper’ – a one-off move with the option to re-expand the pace of purchases if things go wrong. ‘Tapering’ would imply a steady reduction in the size of bond purchases, so perhaps then this is a ‘taper fade’, which is (I’m reliably informed) a hairstyle favoured by David Beckham.
The ECB announcement maintains an accommodative stance for monetary
policy, steepening the yield curve even as it signals that the age of
central bank bond-buying is drawing to a close. That’s left us with
slightly higher longer-dated Bund yields, slightly wider peripheral
yield spreads in Europe and, so, a drift back down for the euro.
We’ll see what the Fed does next week and then look forward to months of political uncertainty taking EUR/USD to parity.