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Focus on inflation expectations and QE forward guidance

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ECB likely to leave policy unchanged

The European Central Bank will be meeting this Thursday, December 4th for its final monetary policy review meeting for the year. The main focus of the meeting will be the widely talked about QE (read as sovereign bond purchases) with a part of the markets expecting to see some kind of additional easing measures to be announced this week.

However, given the fact that the second tranche of the TLTRO is up for grabs next week, December 11th, it is unlikely that the ECB will announce any additional easing measures, while it is more likely to continue to talk down the Euro. This view was further strengthened by comments from Vitor Constancio that the ECB is willing to wait and see the effects of the TLTRO and the ABS purchases.

Few weeks ago, Draghi’s speech which focused on the Eurozone inflation and that the ECB would be ready to act saw the Euro stage steep declines, but ever since, the Euro has been going nowhere but bouncing off the dovish comments from the likes of Vitor Constancio, and the hawkish comments from Jens Weidmann a staunch opponent to sovereign bond purchases.

The markets will be particularly tuned to any forward guidance on the possibility of unleashing a full blown QE. Comments from the Vice President, Constancio did however point to Q1 2015 being the possible time line when the ECB could start to announce further easing measures especially in light of the fact that Germany has also started to feel the effects of a slowdown in its economy.

The markets at this point are simply bearish on the Euro on the prospects of QE. However, as pointed out in this recent article by Reuters, there exists no incentive for the banks, which form the primary market for the ECB to purchase the sovereign bonds from, in lieu of the negative deposit rates, an issue which is likely to come up closer towards any of the next three monetary policy review meeting of the ECB.

The Eurozone inflation hasn’t moved much in the past couple of months but remains firmly de-anchored from the ECB’s target of 2%. This is another factor to watch out for as the ECB will also be revising its staff inflation and growth expectations.

inflation expectations and QE forward guidance

 

The EURUSD has been stubborn after breaking the lows of 1.2512 made during the September ECB meeting despite being in a strong downtrend, supported by the falling resistance trend line and has twice managed to bounce off the recent lows made at 1.23625. A break below this level could possibly see the EURUSD decline to lows of 1.2164, whereas an upside bounce above 1.2512 could potentially pave way for another rally to retest the previous resistance at 1.283 levels.

Besides the ECB’s press conference, Friday’s US non-farm payroll data will be another key risk to the EURUSD, with any lesser than expected NFP reading could simply lift the Euro off any ECB induced lows.

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