European Central Bank Anticipated to Taper But Extend Duration
The US dollar is mixed against major pairs on Wednesday. The greenback is weaker against the pound, euro, yen and Swiss franc and appreciated versus the commodity pairs (kiwi, aussie and the loonie). The Bank of Canada (BoC) kept rates unchanged and provided dovish comments that took the CAD to a three month low after the press conference hosted by Governor Stephen Poloz. The USD could not contain the rise of the EUR even with a higher than expected durable goods indicator and the single currency will keep trading near 1.18 ahead of the central bank announcement.
The European Central Bank (ECB) monetary policy meeting on Thursday, October 26 at 7:45 am EDT will be the highlight of the week for the EUR/USD pair. President Mario Draghi will host a press conference at 8:30 am EDT. The ECB is expected to announce the tapering of its QE program, but at the same time extend the actual bond buying by 12 months or more. The amount of bonds for purchase could be halved to 30 billion but the program could remain in effect until December 2018.
The EUR/USD rose 0.35 percent on Wednesday. The single currency is trading at 1.1803 ahead of the ECB monetary policy statement to be released on Thursday. The market is waiting in anticipation on how exactly the central bank will accomplish being hawkish and dovish at the same time. The ECB has hinted that it is ready to taper its quantitative easing program down from the current 60 billion euros on monthly purchases down to 30 billion. To avoid a “taper tantrum” Mario Draghi and company is also expected to extend the duration of the program by 9 months. In short an aggressive cut, but with a longer period to keep accumulating bonds.
ECB President Mario Draghi already made clear that rates will continue to be lower, but for now the reduction of the QE bond purchases could boost the Euro despite the expected longer duration of the program. The last time the central bank cut its program was by 20 billion euros in December 2016.
The wishes of the ECB will be hard to accomplish as a central bank can hardly act without causing volatility. There are obvious signs of strong growth in the Eurozone, but also the rising trend of geopolitical risks is a cause for concern.
Earlier today MarketPulse Analyst Kenny Fisher outlined the positive impact of German business climate, but pointed out that the Catalan crisis in Spain continues:
The German economy continues to fire on all cylinders, with much of the credit going to a robust manufacturing sector. The global appetite for German exports remains strong and consumer spending has been steady. On Tuesday, German Manufacturing PMI posted a strong reading of 60.5, beating expectations. There was more positive news on Wednesday, as German Ifo Business Climate jumped to 116.7, an all-time high. This thumbs-up from the business confidence suggests that the German economy will enjoy a strong fourth quarter.
Spain’s constitutional crisis has been on simmer all week, but the temperature could rise dramatically on Friday, when the Spanish Senate steps into the fray. The Senate is expected to authorize the central government to invoke Article 155 of Spain’s constitution and apply direct rule over Catalonia. This would allow Madrid to dismiss the Catalan government and take control of the regional police and radio and television stations. This drastic clause has never been invoked, and it remains unclear what steps the central government will take under Article 155. Another question mark is how the Catalan parliament will respond. Catalan President Carles Puidgemont has so far avoided explicitly declaring independence from Spain, but could choose to pre-empt a move by the central government to remove him from office. The continuing uncertainty could lead to further unrest and instability. Still, Caixabank, the third largest bank in the country, does not expect the Catalonia issue to affect Spain’s GDP, which the bank projects will expand 2.7 percent in 2018.
Market events to watch this week:
Thursday, October 26
7:45 am EUR Minimum Bid Rate
8:30 am EUR ECB Press Conference
8:30 am USD Unemployment Claims
Friday, October 27
8:30 am USD Advance GDP q/q
