The European Central Bank has been hinting about outright Quantitative Easing (QE) as a possibility, and this includes president Mario Draghi, who mentioned it. However, some of his colleagues have played it down. It now seems more like a question of “when” rather than “if”: ECB Vice President Vitor Constancio talks about gauging it during Q1, according to the advance of balance sheet expansion.
The euro is on the back foot and sovereign bonds already seem to be pricing it.
Constancio not only mentioned the timing but prepared the justification: inflation threatens to continue on the low side on the background of low inflation. The sovereign bond buys would be proportional to each member’s economy. Buying bonds would be a “pure” monetary policy decision that would influence inflation expectations and the exchange rate.
Speaking of he exchange rate, EUR/USD is sliding in range and trading at 1.2455, still above support at 1.2440 and still riding on weak US data.
If we look at European bonds, we see Spanish 10 year bond yields at 1.92%, significantly below 2.226% in the US. Italy’s 10 year yields are at 2.14%. Germany’s yields continue digging lower, now at 0.75%.
The yield gap between the US and Europe is also supporting the dollar versus the euro.