Welcome to our rolling coverage of today’s ECB Monetary Policy Meeting (12.45 GMT). Previews, live coverage and reaction below…
15.05 (GMT) Review of the ECB December meeting
Investor expectations heading into the ECB’s December were decisively Dovish expecting the ECB to cut its deposit rate and also increase and extend int quantitative easing program. These expectations were so strong in fact that the Euro was down nearly 1000 pips from the October meeting at which the ECB first aired its considerations of such moves. Draghi has a reputation of “over-delivering” in terms of policy adjustments and players were clearly banking on the EU chief doing the sae again today, anticipating that the Euro would be set sharply lower. However, this was not to be the case.
The ECB did indeed cut its deposit rate today, in line with the expected 10bps reduction and it did also announce that QE would be extended, now set to run into March 2017 at the least, however there is no current expansion of QE. Although the range of assets approved for purchase has been increased the actual pace of QE, currently at 60bn Euros a month, will not be increased at this stage. These moves were a shock to market participants considering QE expansion a near certainty and EUR reacted sharply higher in response to the news as players took profit on EUR shorts held heading into the meeting as the very crowded EUR short trade has now seen a decent clear out.
Alongside the announced policy adjustments the ECB have also revised lower 2016 inflation forecast to 1% from 1.1% and also 2017 to 1.6% from 1.7%. Draghi did however highlight that the EZ economy is in fact growing stating that credit conditions are improving and QE is working. The ECB’s decision to refrain from an increase in QE at this juncture obviously keeps that option alive should conditions worsen in the New Year but for now the ECB is hoping that the reduced deposit rate and extended QE program will be enough to stimulate the EZ economy.
EURUSD is over 300 pips higher on the day testing the key 1.08/09 area support level with decent selling interest stalling upside momentum. Looking to sell around current levels in line with earlier stated “Sell EURUSD Rallies” trade thesis.
12.05 (GMT) Bank view for this meeting
UBS Spot Desk – “EURUSD: Go Short At 1.0725 EURUSD: All eyes are on today’s ECB meeting. The range from the past couple of days shouldn’t be challenged ahead of the event, but price action should get a bit wilder this afternoon. We expect the heavy tone to remain intact and prefer the short side, but we can’t rule out a squeeze, as everyone seems to be on the same side. Play the intraday moves and plan to enter fresh shorts if the pair gets close to 1.0725, with a stop above 1.0830. Support at 1.0550, 1.0520, 1.0500, and 1.0455; resistance at 1.0620, 1.0680, 1.0740 and 1.0830.”
Societe Generale – “We expect a 10bp cut in the ECB’s Deposit Rate to -0.3% at today’s meeting, more asset purchases (an increase of Eur 10-20bn/month to Eur 70-80bn, including a shift to widen the universe of bonds bought) and the reference to continuing purchases until September 2016 may (should) be dropped. A two-tier deposit rate to reduce the cost to banks is possible, as well. Will this be enough to move theEuro given the way expectations have been ramped up? Our best guess is that Mr Draghi will send a sufficiently dovish and committed message to the market that the Euro will remain under pressure, though two-way volatility can pick up. The US non-manufacturing ISM this afternoon, non-farm payrolls tomorrow, OPEC and the FOMC meeting on December 16 are all still ahead. A correction in the EUR/USD fall is likely after the last of these, however, as positions are reduced and Christmas presents are wrapped. ”
11.45 (GMT) Bank view for this meeting
Goldman Sachs – “We faced a similar situation earlier this year,when consensus was for material ECB QE in the run up to the Jan.22 announcement.In that event, EUR/$ fell five big figures in the three weeks ahead of the meeting (from 1.21 to 1.16),only to fall another two big figures on the day. In short, we think risk-reward to short EUR$ into the meeting remains compelling and we anticipate a 2-3 big figure drop on the day”
RBS – ” RBS expects the ECB to deliver a 20bps deposit rate cut (to -40bps), the monthly asset purchase programme (APP) to rise to €85 billion (from €60 billion) and an extension of the APP to March 2017 (from September 2016). Following a succession of dovish signals from ECB officials in recent weeks, and most notably from Draghi, we think anything less than this would risk disappointing marketexpectations.20bp of rate cuts is now nearly priced in, while our investor poll suggests that ‘consensus’ for QE is for acceleration to around €75bn/month. Partly for that reason we think the risks are skewed toward a more dovish set of policy announcements than we anticipate.”
11.00 (GMT) Expectations for this meeting
Investor expectations for this meeting are geared heavily towards significant action by the ECB. The ECB’s own declaration to review policy measures at this meeting,continued comments by ECB members and chairman in favour of further action and persistent weakness in global factors all point to further ECB easing. Expectations are such that to a very large extent, further action is already priced in, clearly visible in the sharply lower Euro.
With expectations for easing firmly in place, specific focus will be on the extent of policy adjustment at this meeting and the measures utilised. A further ECB rate cut wil be more powerful than simply an increase and/or extension of QE whilst a dual approach of employing both measures will have the biggest impact. Draghi has a clear tendency to “over-deliver” with his policy adjustments, with investors clearly aware of this in the moves we have already seen.
The key policy areas to focus on for this meeting will be:
- Deposit rate cut – How much and is it tiered? Markets are currently expecting a further 10bps reduction
- The size of QE – By how much is QE to be increased?
- The extension of QE – How far past September 2016 do the ECB intend QE to run?
- The indicated openness of policy in 2016 – For example, the ECB cut cut rates but signal that rates are not yet at their lower band and thus signal scope for further easing in 2016.
Markets are expecting a further 0.10bps cut in the deposit rate and an increase & extension in QE. These expectations are what have driven EUR lower over the past month. If the ECB wish to see EURUSD down to parity and below they are going to have to surpass expectations in their actions or at-least accompany their actions with language heavy enough to keep expectations of further action high enough to deter EUR shorts from any profit taking post-meeting. If the ECB simply deliver along the lines of consensus, investor scepticism could see a profit taking rally ensue and the ECB will be very mindful of this.
10.10 (GMT) A few trade ideas
If the ECB deliver a rate cut with increase & extension in QE with clear room for further action next year this will weigh heavily on EUR. The BOJ are not expected to enact further easing this year, a dynamic which should lead EURJPY lower into year end.
- The break below the key 134 area base in EURJPY paves the way for a retest of the long term bullish trend line around 128 as first target and the 2015 lows just below.
If the ECB, for whatever reason, fails to impress markets on Thursday then the ensuing investor skepticism is likely to see sharp profit taking on Thursday. A short squeeze in EURUSD presents a great opportunity to re-enter a at better levels ahead of the Decemeber FOMC where the Fed are set to raise rates, which will likely see EURUSD sharply lower at least in the short term.
Sell rallies in EURUSD
- The Euro’s descent back down to 2015 lows has run our of momentum ahead of the ECB meeting with players awaiting a clear directional cue. A short squeeze back up into a retest of the broken 1.08 area lows ,and above it the broken bullish trend line, should cap the upside in EURUSD and as such look to sell into this area targeting a retest of 2015 lows by year end.
9.50 (GMT ) What’s happened since the last meeting?
Following the sharp sell off in initial response to the October ECB meeting EURUSD has since fallen another 500 pips lower as investor expectations have continued to mount in anticipation of further easing measures at Thursday’s meeting. Data since the last meeting has been mixed, though notably hasn’t materially weakened and indeed some areas have improved.
- EuroZone October manufacturing and services PMI data both beat expectations
- EuroZone unemployment declined to 10.8% from 10.9% previous.
- EuroZone CPI improved to 0.1% from 0.% YoY in October, though MoM the 0.1% reading represented a decline from the previous 0.2% reading.
- EuroZone Industrial Production contracted less than expected MoM at -0.3% vs -0.4% expected.and beat expectations YoY
- EuroZone 3Q GDP undershot expectations at 0.3% vs 0.4% expected.
- EuroZone ZEW economic sentiment fell sharply below expectations to print 28.3 vs 35.2 expected.
Alongside the data flow since the last meeting we have also had various comments on the wires from ECB members, most notably ECB chief Draghi who reiterated the seriousness of the threat to EuroZone inflation noting that “downside risks stemming from global growth and trade are clearly visible” and that “signs of a sustained turnaround in core inflation have somewhat weakened.” Draghi also commented on the ECB’s willingness to do “whatever necessary” in order to “raise inflation quickly”.
The minutes release of the October meeting also cast a further Dovish shadow revealing that the ECB was actually considering a potential increase in QE as early as October but it was decided that waiting until the December meeting would avoid any premature actions on a possibly unduly gloomy outlook
9.30 (GMT) What happened at the last meeting?
The ECB’s October meeting delivered a heavy Dovish blow to the Euro as Mario Draghi and the governing council addressed the key weaknesses and threats jeopardizing the path to the ECB’s inflation target. Draghi cited the need for “thorough analysis” of the “strength and persistence of factors” weighing on inflation, among these the persistent weakness in emerging markets (particularly China) which is weighing on foreign demand and exports.
Further recorded threats to the inflation outlook were cited as the possibility of further price declines in Oil markets, though this was not included in the ECB’s “technical assumptions”, alongside the appreciation of the nominal effective exchange rate over the past several months (pre October). Draghi stated that “the degree of monetary policy accommodation will need to be re-examined at our December monetary policy meeting” and in the press conference which followed, markets were shocked to learn that the ECB was considering the potential not only for further QE but also for further reduction in interest rates.
Market reaction to the October ECB meeting saw EURUSD down just shy of 300 pips by midnight October 21st.
9.10 (GMT) Welcome to our day’s rolling coverage
Hello and welcome to our live coverage of today’s ECB Meeting. Here are the key details for the day:
- European Central Bank December Meeting,
- Thursday December 3rd, 1245GMT
- Current rate 0.05%, expected unchanged