Mario Blascak, PhD
Independent Analyst
- Central scenario for ECB is to prolong its asset purchases by €25 billion for 9 months
- Deviation on the upside in total volume of intended asset purchases is EUR negative
- Deviation on the downside in total volume of intended asset purchases is EUR positive
On its highly awaited October meeting, the ECB Governing Council is set to decide on future of its asset purchasing program that is currently set to expire this December.
The market does not expect the ECB to end its asset-purchasing abruptly and it is widely expected that the ECB will keep buying assets in the total volume of €20-€30 billion on monthly basis for another 9-12 months.
Prolonging asset purchasing program and buying less on monthly basis seems fitting both sides, hawks and doves within ECB’s Governing Council as such strategy enforces additional stimulus for the individual economies of Eurozone.
The EUR/USD market is currently stuck to narrow range of 200-pips for the last month trading between $1.1680-1.1860, but with the new policy measure, foreign exchange market will discount changes immediately.
By doing less for longer, the ECB is basically prolonging the current asset purchase program and this is what is priced on the market already with euro trading off its highs of above $1.2000.
Tapering scenarios
What actually matters for the market direction is the total volume of intended asset purchasing. With the central scenario of the ECB buying €225 billion during the period of 9 months the US Dollar is likely to be boosted only if ECB announces to buy more.
So if the ECB announced monthly purchases of €30 billion for another 12 months, it is likely that EUR/USD will fall lower.
Even the combination of €25 billion for another 12 months is EUR/USD negative.
On the other hand buying less for a shorter period of time is EUR/USD positive giving it a boost to attack cyclical highs of above $1.2000 from the beginning of September.
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