Just as Yellen gave another hawkish touch and EUR/USD dropped to 1.0550, a report by Bloomberg about the ECB not changing forecasts lifted the pair back above 1.06.
Is this a sell opportunity? Here’s why:
According to the report, the inflation forecast for 2016 will be largely unchanged at 1.6% instead of 1.7%. This could imply less action on the deposit rate and the on expanding QE.
Also in January, ECB insiders spoke to the press and there was talk about monthly bond buys of 40-50 billion and a package of 500-750 billion in total. The announcement was for 60 billion / month and 1.14 in total.
By under-promising and over-delivering, Draghi created a bigger drama, a higher impact move on markets and also a longer lasting one. We explained this in the preview.
We might see this happening once again.
At the beginning, Draghi had to negotiate with his peers, especially the German inflation hawks. Yet as time passed by, his authority increased and the situation genuinely deteriorated.
And while we have seen some signs of improvement from the unemployment rate for example, the ECB is clearly failing on its mandate. Just today, the updated inflation figures showed more weakness, confirming what Draghi said about the “weakening of the strengthening of core inflation”.
We don’t have to wait too much: the decision is less than 24 hours away.
ECB December Decision – All the updates
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