Draghi gives the market what they want, EUR falls

• ECB announce EUR1.1trn asset purchase plan of Eurozone debt/bonds

• Greece excluded until new fiscal reforms made, election due Sunday 

• Will last until Sept 16, or until there is a "sustained adjustment" higher in inflation, whichever comes sooner.

• Single currency falls to 11 year lows versus the USD and fresh 7 year lows versus GBP. More expected to come

Good morning,

Yesterday ended up being a day of largely met expectations. The European Central Bank’s decision to announce a plan to purchase assets in a bid to create inflation and stimulate demand in the Eurozone is long overdue but has not disappointed market participants yet. The European Central Bank has announced a plan worth around EUR1.1trn to purchase the bonds of Eurozone nations starting March. This was on the larger side of expectations and will last until Sept 2016, or until there is a "sustained adjustment" higher in the path of inflation, whichever comes sooner.

The bonds that they buy will be of Investment Grade i.e. not Greek or Cypriot issues. The Bank was unanimous that this kind of stimulus is legal, however was not unanimous on whether to launch it now, and only had a consensus on risk sharing. This is a symbol that there is still quite a fair bit of opposition to this plan moving forward.

This is not a free lunch for countries within the EZ, however. Draghi warned it would be a "big mistake" for countries to use QE as an excuse for fiscal expansion i.e. more spending, less austerity. Indeed with Greece excluded from the benefits of the QE plan until a new fiscal austerity plan is signed, this heaps pressure on Alexis Tsipras and his Syriza party ahead of the election this Sunday.

This weekend sees the Greek people go to the polls for the fifth time in eight years to vote in parliamentary elections and elect a Prime Minister. If there is one country’s elections that have underpinned and come to characterise the pitches and turns of the Eurozone debt crisis it has been those of Greece.

The polls coming into the last week of campaigning have been remarkably stable. Alexis Tsipras’ Syriza party remains in the lead, ahead of the ruling New Democracy party and the current PM Antonis Samaras by around three percentage points. We think that this lead will be maintained into polling day. If that is the case, then, as is the case in Greek electoral law, they will be awarded 50 extra seats for winning the popular vote. While the polls suggest that this will not give the Syriza party an overall majority, the prospects for a left-leaning government – a partnership with PASOK or the new KIDISO party for example – are very possible.

More on this will be available in our Greek Election whitepaper published later today.

The market reaction to yesterday’s announcement has been to sell the euro aggressively while yields on European debt have fallen across the board. EURUSD has plumbed 11 year lows while GBPEUR is above 1.32, the highest since March 2008. Record low bond yields have been seen on the Spanish, Italian, French and Irish 10yr bonds as well as on the German 2yr note. That’s the impact of having a new player in the market coming to buy EUR60bn worth of bonds a month.

So where now I hear you ask? Banks are lining up to see which one can call the euro the lowest in the coming months, and the combination of this QE plan and the near-term strength of the US and UK economies should continue the single currency’s relative decline. The next stop on EURUSD seems to be 1.11 with traders focusing on the 1.33 figure for GBPEUR.

Overnight, the news that Saudi Arabia’s King Abdullah has died has seen oil markets run higher. The transition and succession of the throne is expected to be smooth but as with all market uncertainties, traders are prepared to take the commodity higher. King Abdullah was a supporter of Ali al Naimi, the Saudi oil minister, and his hard-line position on taking the oil price lower. The former’s death may bring a change in policy but I think that this is a long shot.

Today’s data calendar from the Eurozone sees a lot of preliminary manufacturing and services PMI data which is unlikely to really shift the single currency too much. Traders will be looking to smash the euro lower through the session before squaring off positions ahead of the news from Athens on Sunday.

UK retail sales are due at 09.30 where we are likely to see the number follow the recent US measure, with falling demand in December following the import of Black Friday and the hideous behaviour that comes with it.

Have a great day and a better weekend.