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Euro May Rise Even if the ECB Extends and Expands QE Effort

Euro May Rise Even if the ECB Extends and Expands QE Effort

Ilya Spivak, Head Strategist, APAC

Talking Points:

  • ECB expected to extend QE program, broaden eligible assets
  • Euro may rise if ECB inflation outlook puts target within sight
  • NZ Dollar up as RBNZ’s Wheeler signals end of rate cut cycle

All eyes are on the ECB monetary policy announcement in European trading hours. Inflation has firmed since the central bank introduced its QE effort in early 2015 – hitting the highest level in nearly three years at 0.6 percent last month – but remains well below policymakers’ target of near 2 percent. That has stoked expectations that it will be extended beyond its expiry in March.

The ECB has soaked up so much paper already that extending the QE effort will probably mean broadening the scope of assets eligible for purchase. Policymakers may also scrap the restriction on buying bonds with yields below -0.4 percent or do away with the so-called “capital key” that guides the share of purchases allocated to a given Eurozone country’s debt (as argued in our weekly Euro forecast).

On balance, this much may already be priced in. Another key variable at play is the updated set of inflation forecasts. The ECB aims to keep QE until it is confident that price growth is heading in the right direction, meaning it could start unwinding it well before hitting its target. This means that the Euro may rise if officials fall short on any measures already expected or meaningfully upgrade their inflation outlook.

The New Zealand Dollar outperformed in overnight trade after RBNZ Governor Graeme Wheeler appeared to bury rate cut speculation, saying current policy should see inflation reach the 2 percent target. He added that the low point for inflation has probably passed and predicted strong growth prospects for the island nation’s economy over the next 18 months.

Join our coverage of the ECB rate decision and follow the market reaction live!

Asia Session

GMTCCYEVENTACTEXPPREV
23:50JPYBoP Current Account Balance (¥) (OCT)1719.9b1545.0b1821.0b
23:50JPYBoP Current Account Adjusted (¥) (OCT)1928.9b1716.5b1477.3b
23:50JPYTrade Balance BoP Basis (¥) (OCT)587.6b603.0b642.4b
23:50JPYGDP SA (QoQ) (3Q F)0.3%0.5%0.5%
23:50JPYGDP Annualized SA (QoQ) (3Q F)1.3%2.3%2.2%
23:50JPYGDP Nominal SA (QoQ) (3Q F)0.1%0.2%0.2%
23:50JPYGDP Deflator (YoY) (3Q F)-0.2%-0.1%-0.1%
23:50JPYGDP Private Consumption (QoQ) (3Q F)0.3%0.1%0.1%
23:50JPYGDP Business Spending (QoQ) (3Q F)-0.4%0.2%0.0%
23:50JPYBank Lending Incl Trusts (YoY) (NOV)2.4%-2.4%
23:50JPYBank Lending Ex-Trusts (YoY) (NOV)2.4%2.5%2.4%
0:01GBPRICS House Price Balance (NOV)30%26%23%
0:30AUDTrade Balance (A$) (OCT)-1541m-610m-1272m
2:00JPYTokyo Avg Office Vacancies (NOV)3.75-3.64
3:41CNYTrade Balance (CNY) (NOV)298.11b320.00b325.25b
3:41CNYExports (CNY) (YoY) (NOV)5.9%-1.0%-3.2%
3:41CNYImports (CNY) (YoY) (NOV)13.0%3.6%3.2%
3:55CNYTrade Balance ($) (NOV)44.61b46.90b49.06b
3:55CNYExports ($) (YoY) (NOV)0.1%-5.0%-7.3%
3:55CNYImports ($) (YoY) (NOV)6.7%-1.9%-1.4%
4:30JPYBankruptcies (YoY) (NOV)-2.53%--7.95%
5:00JPYEco Watchers Survey: Current (NOV)48.6-46.2
5:00JPYEco Watchers Survey: Outlook (NOV)49.1-49.0

European Session

GMTCCYEVENTEXPPREVIMPACT
6:30EURFrance Non-Farm Payrolls QoQ (3Q F)0.3%0.3%Low
7:30EURBank of France Bus. Sentiment (NOV)10099Low
12:45EURECB Main Refinancing Rate 0.0%0.0%High
12:45EURECB Deposit Facility Rate -0.4%-0.4%High
12:45EURECB Marginal Lending Facility 0.3%0.3%High
12:45EURECB Asset Purchase Target €80b€80bHigh

Critical Levels

CCYSupp 3Supp 2Supp 1Pivot PointRes 1Res 2Res 3
EUR/USD1.06281.06861.07191.07441.07771.08021.0860
GBP/USD1.24001.25131.25701.26261.26831.27391.2852

--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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