ECB: Lower for longer 2.0

The Eurozone economy has not changed since the September ECB meeting and even though the results of the German elections have somewhat dampened the eu(ro)phoria of the summer months, survey indicators still point to a continuation of the recovery well into 2018.

Key Quotes

“As inflation (expectations) remain low and clearly below the ECB’s preferred 2% level, strong growth will be essential for the ECB to publicly announce details of its tapering of QE for 2018 next week.”

“What this means for markets?

FX market: One-off move in EUR/USD higher followed by range trading

We look for a knee jerk reaction in EUR/USD higher, potentially testing the 1.20 level in response to the expected cut in QE from €60bn to €25bn per month. Yet the lower for longer QE anchoring the scale of Bund sell-off and Italian elections in early 2018, suggest only ‘one-off’ EUR/USD upside. We look for the cross to range-trade in coming months and only spike higher in 2Q18 once Italian election risk passes.

Bond market: Controlled/muted sell-off and steeper curve

We look for Bund curve steeping (2s10s and 5s10s) as the front-end and, to a moderate extent, the belly will benefit more from the forward rate guidance vs 10yr. While long-end rates should go higher, the relatively non-negligible cut in monthly purchases from €60bn to €25bn should be partly offset by the commitment to a 12m buying period. Moreover, following ECB officials’ comments, the lower for longer QE should not come as a complete surprise, limiting the extent of any sell-off.”

“Ideally, the ECB would like to announce tapering as noiselessly as possible, limiting any upward movement of interest rates and the euro to a bare minimum. This is why we expect the ECB to announce a ‘lower for longer’ tapering (as in December 2016), reducing the monthly QE purchases to €25bn and extending them until the end of 2018 at its next meeting on 26 October.”

“In addition, we expect Draghi to emphasise ‘sequencing’, ie, the fact the ECB will not raise interest rates before the end of QE.”

Share: Feed news

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.