The big news this week in FX markets was unquestionably the European Central Bank’s (ECB) monetary policy announcement. At which ECB President Mario Draghi announced an expanded QE program. The ECB has now committed to €60bn worth of asset purchases a month.
Commencing in March and lasting until at least September 2016, this suggests an initial total value of €1.1trillion. Investment grade government bonds are the main target, but the ECB will also buy asset-backed securities and covered bonds in order to help cut interest rates for European companies.
The announced QE program rings in at the top end of analyst estimates, which ranged from €500bn to €1tn, and lends itself to the degree which the governing council of the ECB is worried about deflation in Europe.
Prices last month in the Eurozone fell by 0.2% year on year, while core inflation (excluding oil and other commodity prices) was 0.8%, still largely below the 2% ECB target. With unemployment running at over 11% and is much higher in places like Spain and Greece (at 24% and 26% respectively), the Eurozone is by no means out of the ‘economic crisis’ woods yet; something President Obama suggested was the case in the US at his State of the Union address this week.
The ECB’s actions caused the euro to crater broadly, seeing it weaken over 3% against USD this week as EURUSD tumbled to its lowest level since September 2013. In the short term oversold technical indicators suggest a temporary consolidation in the pair. However in light of the breadth of the QE program the outlook for the common currency remains to the downside.
The weakness in the common currency was not limited to Greenback, GBPEUR vaulted to its highest level since February 2008. While the outlook for Euro remains weak as described above, with markets cautious of Sterling risk factors (softening rate expectations via below target inflation and knock-on risks from the Eurozone), the trajectory of GBPEUR expectations isn’t quite as steep as those of EURUSD.
This week also saw minutes from the Bank of England’s (BoE) January policy meeting released. To the surprise of markets it was revealed that the dissenting (hawkish) members of the BoE’s Monetary Policy Committee re-joined the majority last month.
This resulted in consensus amongst the committee for the first time since July that the appropriate position on interest rates is to hold as is at 0.5%. This is a significant shift in sentiment, suggesting that the BoE is now unlikely to be looking at rate hikes in 2015. In light of the BoE minutes Sterling found itself on its back foot this week, particularly against the USD. As the week winds down GBPUSD has slipped to its lowest value since July 2013, the pair testing 1.5000.
Following the ECB this week and the Swiss National Bank abandoning its EURCHF floor it has been a landmark couple of weeks for volatility. Given a busy data calendar it seems likely that next week will be more of the same. The risk factors for currency markets get an early start with the Greek election on Sunday. Polling has suggested that the anti-austerity Syriza Party is set for victory on the weekend. This raises concerns about both the possibility of a Greek debt default as well as Greece’s continued membership in the Euro and the broader EU.
Then Tuesday UK Q4 2014 preliminary GDP numbers will be announced. Expectations are that economic output in Britain expanded 0.7% quarter-over-quarter. Pulses will remain elevated on Wednesday when the US Federal Reserve (Fed) makes its regularly scheduled policy announcement. There is no expectation of a policy change, however the accompanying guidance statement will be heavily scrutinized for clues about when Fed chairperson Janet Yellen and her team will be looking to hike rates. Finally, to round the week out, the Eurozone January Flash CPI number will published, the ECB’s preferred measure of inflation. Below target inflation was the catalyst for this week’s QE. Until such a time that inflation starts to move back towards target (+2.0%) the case for loose monetary will remain, which puts the Euro in a place of disadvantage.
In our latest podcast we analyze the SNBomb, do an ECB Preview, discuss US wages, dive into Saudi costs and the look at the Aussie
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