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ECB Ahead, Potential Impact on the Euro Exchange Rate Complex

mario draghi euro exchange rate 3

  • Euro to Pound Sterling exchange rate today: 0.8508
  • Euro to Dollar exchange rate today: 1.0790
  • Euro to Australian Dollar exchange rate today: 1.4404
  • Euro to Swiss Franc exchange rate today: 1.0856

The Euro will be guided by the outcome of today's European Central Bank meeting where the issue of the longevity of the Bank's quantitative easing programme will be the focus.

Analysts are expecting the ECB to announce they will keep their quantitative easing programme going beyond the March cut-off date, and dismiss recent talk of ‘tapering’ the programme which is designed to keep Eurozone bond yields down. 

If bond yields are kept low then the cost of borrowing across the entire Eurozone is kept low, ensuring economic growth and inflation can climb as companies are able to invest cheap borrowings.

The results of the meeting are announced at 12.45 (GMT) and the press conference with Mario Draghi follows at 13.30.

The meeting is considered as an important event by the foreign exchange markets as there is a chance the ECB could either extend their quantitative easing (asset purchase) programme beyond its March 2017 end date, or confirm the programme will gradually end in 2017.

An extension of QE would ostensibly be expected to weaken the Euro exchange rate complex and ensure the recent downside in EUR/USD extends, a base-case scenario posited by analysts at Morgan Stanley.

Tapering - the slow closing of the programme - would be expected to strengthen the Euro and lead to further upside for EUR/USD as Eurozone bond yields would be expected to jump.

"The ECB’s forward guidance is also likely to change as part of a compromise with the hawks to signal an eventual end to asset purchases by deciding to gradually free itself from the straightjacket of monthly purchases by setting a maximum APP size for a given period. Such an outcome potentially risks a further moderate squeeze up in EURUSD," says a note from Citi Economics ahead of the event.

Any further moves higher in EUR/USD will aid the Euro to Pound Sterling exchange rate (EUR/GBP) which has moved higher over recent days.

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Eurozone investors have for years been squeezed out of the European bond market as the ECB has been heavily active ensuring the price of bonds are expensive. 

This has seen the Euro sold as investors seek to invest capital in foreign markets.

Tapering of the programme would likely see bond prices start falling and vast suns of capital repatriated to the Eurozone which would in turn bid up the value of the shared currency.

The base-case scenario for Vancouver-based TD Securities is that the ECB will extend their asset purchase programme beyond March to the end of 2017 – with several provisos -  and that EUR/USD will rally to 1.0810 on the news.

The provisos are that the current 80bn per month rate of QE will only extend until June 2017; after that, it will be tapered to the end of the year.

As part of their base case scenario TD expect the ECB to loosen the fairly strict criteria for inclusion in the QE programme.

This means the ECB will be able to buy a wider spectrum of bonds than currently.

For example, currently the ECB cannot buy bonds with a yield lower than their -0.4% deposit rate, but they are expected to scrap this rule at their meeting on Thursday.

Further, they see the ECB’s macroeconomic projections and foreseeing inflation picking up to 1.8% in 2017.

The Bank’s forward guidance, moreover, will be to shy away from setting a ‘pre-set course’ for policy but rather using data as a guide.

If the ECB decide to taper QE after the March cut off day, TD expect EUR/USD to rise to 1.0850.

If the ECB decide to extend QE at 80bn until the end of the year TD forecast the EUR/USD pair falling to 1.0690.  


UniCredit’s Preferred Scenario

Italian lender Unicredit forecast the ECB to extend their current QE programme at the same rate of 80bn a month until the end of 2017.

According to TD’s projections, this will have a dampening effect on EUR/USD, pushing it down to 1.0690.

The ECB will want to keep monetary policy accommodative due to the subdued inflation expectations, says Unicredit’s Marco Valli.

“The decision to keep buying assets at the pace of EUR 80bn per month would be mainly intended to preserve the current “very substantial degree” of monetary accommodation, at a time of limited progress towards a “sustained adjustment in the path of inflation consistent with the Governing Council’s inflation aim”,” said Valli.

A cut in the quantity of purchases per month such as has been suggested by other analysts is not likely because it would be perceived as tightening conditions.

Tapering would similarly be seen as tightening, though less so, according to Valli.

ING Adopt Contrarian Stance

ING’s stance is similar to Unicredit’s, in that they expect the ECB to extend their QE programme at its current monthly rate of 80bn, but instead of expecting to run until the end of 2017, they forecast it to continue for another two quarters.

What’s more, they see this as being “Euro-neutral”.

They also see a loosening of the criteria for inclusion in the programme in the same way as TD, with a lower negative yield threshold and a rise in the share of bonds which can be bought by the ECB from each issue.

Their rationale for expecting continued accommodative policy is that the ECB will not want to upset markets given the sensitivity of Italian Banks to changes in rates.

They are contrarian in the way they see other outcomes impacting on the Euro.

Unlike TD they do not expect the Euro to rise if the central bank tapers, but rather to fall.

This is because it would raise concerns about the financial stability of the periphery, especially Italy.

For the same reason, an increase in accommodation might actually be positive for the Euro as it would result in relief from concerns about the periphery.



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