ECB president Mario Draghi laid out the details of the ECB QE. This rate decision, that was seen by some as an anti-climax after the QE announcement last time, provided a lot of important data.
Here are the main points, and an attempt to answer the question: will EUR/USD fall off the edge of 1.10 and fall much lower?
Update: EUR/USD fell off the edge – trades under 1.10
Here are key points:
- ECB QE begins on March 9th: that’s this Monday – basically around the corner. No need to wait too much. Details will be released after every meeting.
- Buying bonds with negative yields: the ECB will go as low as minus 0.20% – this is the deposit rate set by the central bank back in September. Draghi said that in the event. This means buying longer maturity German debt, as well as debt of other countries which already have negative yields.
- Forecasts: We had an upgrade of forecasts, but they rely on the ECB’s actions – without the ECB’s mass bond buying and extremely low yields, the ECB does not see these forecasts materializing. This is a key point that takes the sting out of the optimism from the upgrades. 2016 inflation was upgraded from 1.3% to 1.5%, and 2017 is expected to see 1.8%. Note that inflation for this year was actually downgraded to 0%. The ECB blames oil prices, and that makes sense at least for 2015.
- Mixed view on inflation: On one hand, Draghi pats himself on the back by saying that the stimulus significantly reduced the risk of second round oil effects. On the other hand, he acknowledges that core inflation is still too low. In general, there is optimism for the future but not the nearer term.
- No firm deadline: September 2016 remains an intended end to QE, but if needed, QE could go on and on. This is a reaffirmation of what he said last time, killing speculation. Some could see the optimistic 2017 forecast as implying that QE will indeed end in September 2016, but that’s so far away, so nobody really knows.
- Greece still out, at least until the summer: The ECB excludes countries which are in a program and cannot accept collateral of bonds which are not investment grade. However, this may begin in the summer, depending on conditions.
EUR/USD jumped as high as 1.1123 following the upgraded forecasts, but then fell below previous levels.
The low so far has been 1.1005 – perilously close to the very round 1.10 level. We also have a big event tomorrow: See how to trade the Non Farm Payrolls with EUR/USD.
Here is the chart:
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