ECB to announce a 6-month QE extension in December - Danske Bank

Analysts from Danske Bank, point out that today’s ECB meeting did not changed their expectations that the central bank will announced a 6-month extension in their purchase program. They still see the EUR/USD pair with a bearish bias in the short-term and have a bullish outlook longer term.

Key Quotes: 

“The ECB kept all policy rates unchanged, maintained its monthly QE purchases of  EUR80bn and still intends to end its purchases in March 2017. Regarding the outlook for monetary policy, the ECB repeated that it remains committed to preserving the ‘very substantial degree of monetary accommodation that is necessary to secure a sustained convergence of inflation’. Additionally, President Mario Draghi repeated ‘there are no signs yet of a convincing upward trend in underlying inflation’. In our view, this implies the ECB will not conclude QE can be ended in March 2017.”

“Overall, we have not changed our view that the ECB will announce a six-month QE extension at the upcoming meeting in December, as the ECB provided little information at today’s meeting.”

“Early in the Q&A session, Draghi made some hawkish comments, as he said the ECB had not discussed QE extension and concluded the extraordinary policy support would not exist forever resulting in higher EUR/USD. However, the market reaction was reversed when Draghi later said the ECB also did not discuss QE tapering or the intended purchase horizon.”

“According to Draghi, an abrupt end to QE was never discussed and was deemed unlikely, which in our view should not be much of a surprise to market participants. The ECB did discuss negative policy rates and the conclusion from Draghi was they do not hinder the transmission of monetary policy.”

“EUR/USD initially bounced when Draghi said that the Government Council had not discussed an extension of QE. However, it fell back again when he said that they had not discussed tapering of QE either. EUR/USD broke the important level of 1.0950 and we see relative interest and growth expectations as bearish for EUR/USD near term, forecasting the cross at 1.08 in 3M. Medium term, we continue to be EUR/USD bullish, forecasting 1.11 in 6M and 1.15 in 12M on valuation and a eurozone-US current account differential.”