Gold Plummets On News Of Intended ECB Tapering

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ECB To Taper QE

Comments from the ECB yesterday noted that the bank would begin to gradually reduce bond purchases once the QE programme ends. Officials said that an informal consensus had been established among the bank’s policymakers for QE to be tapered once the programme concludes. Initial expectations are for the tapering to be around E10billion a month, similar to the Fed’s tapering. The news came as a shock to markets yesterday with Draghi having previously stated that the bank had not discussed these topics.

According to sources an extension of QE beyond the current March 2017 end date was not discussed. Markets were caught offside by the news with EURUSD popping above 1.12 and German 10Y Yields spiking 4 bps.

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Gold suffered its worst day in a year as the prospect of tapering led a sharp covering of long positions. The precious metal crashed down through the rising trend line which has underpinned price all year. For now Gold has stalled at the 61.8% Fibonacci retracement of the last leg up.

ECB Disappoints Doves.

Investor expectations over the summer had built up in favour of further ECB easing driven by Brexit uncertainty and the bank’s forward guidance ahead of the referendum. However, despite these expectations markets were left disappointed in July when the bank struck an unexpectedly neutral tone, downplaying the impact of Brexit. A slew of positive data prints since then have further confounded bearish expectations with EUR short positions being covered accordingly.

The argument for tapering is the prospect of rising inflation over the coming months. The ECB forecasts inflation to be at 1.2% in Q1 2017, but 0.7% of the anticipated pick-up is driven by Oil prices. The increase, therefore, won’t imply that the bank has observed a “sustained adjustment in the path of inflation” and hence end the QE programme. The ECB is instead likely to remain focused on low core inflation which is not yet on track to rise towards its historical average next year as forecast by the ECB.

However, it is key to point out that no formal talks on adjustments to asset purchases have commenced yet. With this is mind there is still scope for incoming data and future developments such as Formal Brexit, European banking sector worries and Italian referendum to disrupt the ECB;s forecasts which could in fact lead to QE being extended.

QE Extension Still A Possibility

Indeed, there were two key points made by Draghi at the recent meeting which suggest the bank will still introduce an extension to its current QE programme.

First, Draghi noted that “over the coming months HICP inflation is expected to pick up, in large part owing to base effects. Yet underlying price pressures continue to lack a convincing upward trend and remain an ongoing source of concern”.

Secondly, Draghi noted that “Importantly, the projected path of inflation remains conditional on exceptionally supportive financing conditions… the full impact of the March decisions is now in the macroeconomic projections… These low rates do reflect to some extent expectations of a continuation of the extraordinary monetary policy support”.

Traders will be paying close attention to the ECB at their upcoming October meeting in two weeks’ time, and Draghi is sure to be questioned about tapering during the press conference following the decision.

Technical Perspective

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For now, EURUSD remains firmly in consolidation mode with price action having stagnated over the last few weeks. The next clear catalyst for a directional move will be the US employment reports on Friday. Market consensus is expecting a stronger number which will likely boost US rate hike expectations and weigh on the pair.

The contracting triangle which has frame price action over the past few months remains intact with local structural support at the late August lows of 1.1120 underpinning the current phase.

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