ECB preview: QE end is in sight
Fawad Razaqzada June 14, 2018 11:36 AM
Unlike the Federal Reserve yesterday, the European Central Bank won’t be raising interest rates later on today, but the EUR/USD could nonetheless push higher. ECB Governing Council members have delivered hawkish remarks on the Eurozone economy recently and this has led to some chatter that the central bank may announce its intention to end EQ at the end of the year. What’s more, the dollar has failed to respond in the way one would have reasonably expected it to have done. Neither a strong US CPI nor a hawkish Fed was enough to lure buyers in. This must be a sign that the greenback has probably created a short or possibly a longer term top. If this is indeed the case then the EUR/USD could surge higher and make its way towards low 1.20s again.
The ECB’s asset purchases programme could be coming to an end. Inflation in the Eurozone has risen sharply and with a slightly lower EUR/USD exchange rate compared to a few months ago, not to mention the recent upsurge in oil prices, the ECB’s macroeconomic projections are set to forecast higher inflation in the near-term. The ECB cannot risk letting inflation get out of control and must deal with it before it is too late.
So, at the conclusion of today’s meeting, the ECB may explain how and when QE will end. There is also a possibility that it could wait until the July meeting to spell out the exit plan. In any case, the markets are desperate for some clear guidance, but we have had some indications already.
The central bank’s chief economist Peter Praet has been vocal about the possibility of unwinding QE or ending it at the end of 2018. Last week he said the ECB “will have to assess next week if to unwind APP,” adding that he expects interest rates to remain at present levels for an extended period of time. He thinks there is “growing evidence that labour market tightness is translating into a stronger pick-up in wage growth,” which is pushing up inflationary pressures. Influential ECB policymaker and the Bundesbank President Jens Weidmann has said market expectations about ending QE by the end of 2018 are plausible as inflations are expected to gradually return to the central bank’s 2% ECB target. Dutch Governing Council member Klaas Knot has said it is “reasonable to announce the end of APP soon.”
The euro has risen after the ECB officials talked about the prospects of ending QE and could extend those gains if the central bank confirms it today. Mario Draghi’s press conference is therefore eagerly anticipated by euro bulls. However, with expectations high that the APP will end in December, there’s scope for disappointment if Draghi and co. dismiss that possibility. In this potential case, the euro could turn sharply negative.
Ahead of the ECB, the EUR/USD was pushing higher, trading above the 1.18 handle at the time of writing. This comes after the dollar spiked following the FOMC rate hike the day before. The Fed raised Fed funds rate by 25 basis points to a range of 1.75-2.00%, which was in line with the expectations. The seventh hike since December 2015 was accompanied by a hawkish message in the “dot-plots” which showed two additional rate increases in 2018 as opposed to one in March. However, the EUR/USD refused to be held back and quickly posted a new post-Fed hike.
If the EUR/USD can now climb and hold above the 1.1820-1.1850 resistance area then a rally towards the next area of resistance in the 1.2000-1.2090 could be on the cards and we could possibly get there as early as today in the event of a hawkish surprise from the ECB. However, in the event of a dovish surprise, then EUR/USD could break the 1.1730 support and head towards the trend line around 1.1600 again.
Source: eSignal and FOREX.com
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