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Will the ECB Signal Taper Next Week and Turn the Euro's Tide?

Will the ECB Signal Taper Next Week and Turn the Euro's Tide?

2016-10-15 03:13:00
John Kicklighter, Chief Strategist
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Talking Points:

• The ECB rate decision is scheduled for this coming Thursday, October 20th at 11:45 GMT

• Economists suspect the ECB will soon run out of viable bonds for QE and the Draghi will soon announce a pullback

• When then-Chair Bernanke announced the Fed's 'Taper' in 2013, the markets responded dramatically

See the DailyFX Analysts' 4Q forecasts for the Euro, Dollar, Pound, Equities and Gold in the DailyFX Trading Guides page.

Eventually, the European Central Bank (ECB) will back off of its seemingly boundless stimulus program and find itself in the same position the Fed was in a little over three years ago. Back in May 2013, then-Federal Reserve Chairman Ben Bernanke prepared the market for a reduction ('Tapering') in the monthly QE3 Treasury purchases that was the backbone of global accommodation - and arguably one of the key drivers for speculative reach. After the June 18th confirmation of that plan, the market's reacted dramatically. The Dollar rose, the S&P 500 slid, Treasuries dropped and Emerging Markets were thrown into panic.

It may seem inconceivable that one of the most prolific doves in the world will turn course, but that was the same sentiment that surrounded the Fed until it made the inevitable move. For the ECB, there are crucial milestones that they must follow and signals that they have provided as warning for the open market. Estimates that they are running short of viable government bonds to purchase and tentative forays into riskier assets markets a tipping point they are unlikely to be interested in forcing. Even if they kept the pace for now, the planned end to the QE program is March 2017 - with a possible extension to September. The countdown is going.

From the ECB, we have heard regular arguments from President Draghi that monetary policy could not solve economic problems alone and leading many to believe their effective limits had been reached. He has also broached the topic of eventually pulling back from the open-ended stimulus effort in the foreseeable future. That is where this week's ECB policy meeting comes into play. Substantial forewarning is necessary before action on slowing asset purchases if they intend not to upset the markets too much. Will they take this opportunity to start the process? Will there be the same degree of 'Taper Tantrum' as the Fed experienced in 2013? Would the early shift in monetary policy course systemically alter the perception of the Euro? We discuss that in this weekend Strategy Video.

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