the daily chartist

22.10.2015 ECB Aftermath and the Euro crackdown

published 4 years ago
EUR/USD Daily

The awaited moment for the Euro Bears has arrived after the ECB meeting on Thursday. Here are the highlights and the short story:

First the "D-Day" started with the news about the interest rates. ECB left them unchanged at the governing council meeting. Which was expected as it seem ECB is in a waiting period as to see what the US and UK will do with their rates. 

  • Main rate remained same at 0.05%
  • Deposit rates remained the same also at -0.20%
  • Marginal lending rate was at hold too at 0.30%

 After that the ECB meeting began and Draghi started talking. He draw again on the table the possibility of more QE for the December meeting. That's when forecasts are update. He also said QE will continue until September "or beyond if needed" as he stated. That's not particularly new with the first comments, it adds to the dovish flavour of his comments. 

 Dropping the QE bomb he noted his concern over the Emerging Market.

As noted:

  • QE is intended to run until Sep 2016 or beyond if necessary
  • QE will run until ECB sees sustained adjustment in the path of inflation
  • Says there are still concerns over emerging markets

 No more dovish than that and a big indication that ECB is ready to do more if needed

EUR/USD ducked to 1.1228, bounced to 1.1255 on the news. 

EUR/USD 1H

  • Recovery to continue albeit dampened by weak foreign demand
  • Growth likely to be dampened by balance sheet adjustment and sluggish structural reforms
  • Increased uncertainty has manifested in financial markets
  • Downside risks have emerged for growth and inflation outlook

In the Q&A section several things were stated and made a highlight: 

  • Today's meeting was a work and asses
  • Mon POL should not be the only game in town
  • There was a very rich discussion about all mon pol instruments
  • There has been no specific choice of tool, we are open to a menu of instruments
  • Council has tasked committees to work on different tools
  • Recovery to continue at same pace as Q2
  • Resilience in economy is driven by consumption
  • Low oil price is still a driver of recovery
  • ECB looks at two factors for economy, domestically and internationally
  • Headline inflation will stay low for protracted period
  • Inflation expectations have declined for short term, med-long term is unchanged
  • ECB is ready to act if 2% target i in danger of being puhed back
  • Further deposit rate cut was discussed

Euro went trough 1.1200 to 1.1195. In the inflation section still there were several problems noted when regarding the measurement with the process. As there are several methods and instruments to measurement it, conditions aren't like in a textbook. ECB VP Vitor Constancio noted:

  • Negative inflations rates can be very detrimental
  • There are also deflation risks but a few months of negative inflation is not really deflation
  • If deflation lasts for many months there are increased problems and why central banks are willing to fight that

As the events were unfolding the Euro went down to 1.1179, spreading dovish his majestic dovish wings:

  • ECB hasn't yet seen any bond scarcity
  • QE is helping markets
  • Direct exposure of EZ to China are not very significant
  • Some countries have more exposure than others
  • The confidence channel is the most important channel on China and has not been affected
  • Any large surprise in any large economy could affect global confidence
  • Exchange rate is not a policy target for the ECB, never has been, never will be
  • Euro strength is one downside risk for the economy

There were some Q&A on the noted "tool shed" regarding its arsenal and description clarification:

  • There were a few members that hinted at the possibility of acting today
  • But, acting today wasn't the prevailing theme
  • There was not explicit preference for one instrument, discussion was wide open
  • There is no doubt about the effectiveness of monetary policy
  • The market improvement is being translated into a resilient economy
  • Judgment today is that our monetary stance is essential for a recovery in output and meeting our price stability objective
  • Repeats, ECB sees assumptions change we may change QE or other instruments

Germany wasn't voting on the decision that day and that could be a big feature in Dec when they're back in the frame. 

And finally a comment from th SEB:

"The ECB has already raised market expectations so much that no further monetary stimulus would come as a big disappointment to markets. A change in the terms and conditions of the asset purchasing program looks to be the most likely action. The monthly purchases could be raised to between 70bn and 80bn euros. A cut in the deposit rate is back on the agenda and cannot be ruled out"

This isn't just good for the euro short. The stock market loves it and European (especially periphery) bonds posted a huge rally.

The pair broke trough (finally as the catalyst revealed itself) the inner daily trend line and touched the outer daily line, pushing just a bit. The daily candle slammed hard down with a 236 pips moves. 1.10767 is on the brink of collapse as well and 1.10 is going to be an easy target to reach, but to brake? Friday's close will tell. Moving bellow 1.10, 1.09040 is next and most likely the movement will continue its course even lower to 1.08329 and further down as the daily figure is being broken. New downtrend for the Euro begins.