Euro Has "Limited Room" to Profit From Thursday's ECB Tapering Say Some Strategists
A meeting of the Eurozone’s central bankers will conclude with a press conference Thursday and what they say could have a major impact on the single currency.
The European Central Bank is widely expected to announce a gradual winding down of its quantitative easing (bond buying) program Thursday although there is still division among strategists over the likely calibration this “tapering”.
Some, such as Kit Juckes at Societe Generale and Jacqui Douglas at TD Securities, see a so called “dovish taper” as the most likely outcome on Thursday.
“We look for the ECB to announce QE at €30bn/month for 12 months at next week’s meeting. Recent ECB communication has suggested that emphasis will be on the duration of QE rather than the pace,” writes Douglas, in a note Wednesday.
Other strategists see the ECB cutting the total value of its purchases by a lesser amount, to say €40 billion, but tapering these off over a shorter timeframe. This would mean the central bank exits the bond market in September 2016.
“We expect a volume of EUR 25bn over nine months. This would reduce the prominence of adjustments to the asset purchasing programme,” says David Kohl, chief currency strategist at Julius Baer.
The ECB has been buying Eurozone bonds in order to keep market interest rates low in the hope that this will spur economic activity.
“We see limited room for the euro to profit from the announcement of less aggressive asset purchases,” says Kohl.
Mario Draghi, the ECB president, suggested the central bank could soon begin to taper back in June. This helped to ignite a fire beneath the Euro that saw the common currency gain more than 14% on the US Dollar, 7% on Sterling and assume the mantle of best performing currency in the G10 basket during the summer.
But strategists are now increasingly of the view that the common currency’s winning streak has come to an end for the time being, even if the medium to longer term outlook does remain bright.
“With our base case for the ECB’s QE extension now at the dovish end of market expectations, we think the EUR is likely to come under selling pressure against the USD and other major currencies,” says Douglas.
The Euro-to-Pound rate fell 0.79% to 0.8885 Wednesday in response to a stronger than expected third quarter GDP report from the UK, making for a Pound-to-Euro rate of 1.1254.
Meanwhile, the Euro-to-Dollar rate edged higher by 0.18% to be quoted at 1.1780 as traders bid the Euro higher and took a breather from punting on the Dollar, which saw a more mixed performance in the morning session Wednesday.
Recent strong data has vindicated the ECB for its push to begin withdrawing stimulus from the Eurozone economy, with the latest being Thursday’s IFO Business Climate survey that showed a surprise increase in German industrial confidence during October.
Tuesday’s PMI surveys also underlined the firming state of the Eurozone economic recovery after showing exporters unhindered by a rising Euro, while underlying inflation pressures continue to build.
Overall, in light of recent strong data, rising underlyig inflation pressures and continued growth of Eurozone exports, as well as its trade surplus, observers could probably be forgiven for questioning if a so-called "dovish taper" is even necessary.
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