Talking Points:
- The ECB is scheduled to rule on its final monetary policy course adjustment for the year today
- At the last meeting, the group deferred the difficult decision to start the countdown to Taper
- Italy's Referendum vote adds another element of uncertainty in the EZ but the practical limit to QE is in sight
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There is little doubt that this week's top scheduled event risk is the European Central Bank's (ECB) rate decision. In some ways, this policy meeting is more important than next week's FOMC meeting. While there is significant debate over whether the US central bank will hike rates or not at its meeting on December 14th, the general point the world's second largest central bank is at in its own policy regime is pivotal. Similar to the Fed's position in mid-2013, the European authority is determining the proper time frame to turn the tide on an ever expanding stimulus program. There are a number of reasons to believe this important change in tack will happen soon - perhaps even at this event - or risk stirring deeper fundamental and financial problems.
Three-and-a-half years ago, then-Fed Chairman Ben Bernanke announced that he would begin a wind down of the open-ended quantitative easing program (QE3) they were running. The important turning point to this historic policy regime was motivated by a recovery in economic conditions that was arguably overdue given the extreme effort in place. For the ECB, the inevitable turn does not come with so robust a backdrop. Growth in the Euro-area is stagnant and the existential risk to the monetary and political unions has never been greater. However, there is little recourse. Central Bank President Mario Draghi has made a concerted effort to warn that the boundary of effective monetary policy may be at hand and fiscal stimulus is necessary for a permanent solution. Perhaps more problematic is the concern amongst analysts that the central bank will soon run out of viable assets to purchase to keep the program running.
For scenarios, there are bearish/dovish and bullish/hawkish possible outcomes. That said, there are likely limitations for what the group can reasonable change as well as what they can do to the markets. A dovish outcome would generally be considered bearish for the Euro. Yet, the assumption that the Italian Referendum has ensured the central bank's delay to lay out the path to its wind down is the running consensus and thereby unlikely to render much response. To have a hope of returning EUR/USD to - much less break - 1.0500 may something more extreme measures. An escalation a policy regime that is already seeing sliding influence would likely only cement the ECB's impotence. If President Draghi convinces the group to press forward with a plan to pullback, it would be hawkish but wouldn't guarantee a fast-track version of what the Dollar has enjoyed over the past few years. We discuss this important rate decision in today's Strategy Video.
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