FX MONETARY POLICIES European Central Bank - EUR
At their December meeting, the ECB maintained interest rates with the Main Refinancing Rate remaining at 0.0%, Deposit Facility Rate remaining at -0.4% and the Marginal Lending Facility Rate remaining at 0.25%.
Furthermore, the ECB maintained its plans to reduce the size of asset purchases to €30 billion per month from January 2018 until September 2018.
Regarding the ECB’s growth and inflation f or e ca s t s , inf l a t i o n for 2017 was unchanged at 1.5%, while 2018 was revised to 1.4% from 1.2%. Te year 2019 was unchanged at 1.5%, along with 2020 at 1.7%.
Growth forecasts were also considered positive with 2017 revised to 2.4% from 2.2%, 2018 to 2.3% from 1.8%, 2019 to 1.9% from 1.7% and 2020 as expected at 1.7%. Despite the ECB’s positive revisions to their inflation and growth forecasts, ECB President Mario Draghi’s urged caution on issuing big statements that did not discuss an end date for
64 FX TRADER MAGAZINE January - March 2018 asset purchases.
Te ECB announced an extension of nine months (or beyond if necessary), while reducing the size of its asset purchases from €60 billion to €30 billion per month. Te new purchase rate will take effect from January 2018
Te Unemployment Rate for October fell to its lowest level since 2009 at 8.8%, versus the market consensus of remaining unchanged at 8.9%.
Flash Estimate CPI for November was mixed with CPI Y/Y improving slightly to 1.5% from 1.4% prior, although
below
ex p e ct a t io n s of 1.6%. Core CPI Y/Y beat ex p e ct a t ions, r e m a in ing unchanged at 1.1%, versus the consensus for a decrease to 1.0%.
Revised GDP for Q3 was overall
positive,
with GDP Y/Y exceeding the market consensus of 2.5% at 2.6%, while GDP Q/Q
and the ECB will reinvest maturing QE bonds for an extended period of time.
Te ECB maintained their guidance that ‘rates to remain at present levels for an extended period of time’ and that
they stand ready to ‘increase
size or duration of asset purchases if conditions deteriorate’.
Following the announcement, EUR weakened across the board with more hawkish bets unwinding
and
the addition of ‘beyond if necessary’ regarding the duration of QE.
remained unchanged, as expected, at 0.6%.
I currently view the Euro as having a weak bullish fundamental bias as the ECB has now begun its tightening cycle with asset purchases halved to €30 billion per month. However, no further changes are expected until September 2018.
Jarratt Davis
FX trader, Funds Manager Mentor and Author of
How to Trade a Currency Fund
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