ECB Preview: With Lower-for-Longer QE taper the EUR is seen underperforming

  • ECB set to prolong QE by nine months with €20-€40 billion in monthly purchases.
  • EUR is seen trading sideways after the ECB meeting


With the ECB dropping the forward guidance on interest rates in June and indicating that it will come up with taper plan this autumn, after September turning up a non-event, stakes are high for taper announcement this Thursday.

Given the level of importance and the market expectations, the risks are skewed to the downside for the euro. The ECB President Mario Draghi is a skillful diplomat and eloquent speaker, but having to satisfy hawks (Governing council hawkish camp led by Germany) and to please doves of not ending the asset purchasing program abruptly the optimal result will be to do less for longer. Market consensus is buying €20-€40 billion in monthly asset purchasing with the program running for another 9-12 months.

Obviously, policy hawks want to limit the length of the program by the end of 2018. That has something to do with the round volume of total purchases limited by the amount of €2.5 trillion. 

Prolonging asset purchasing program and by buying less on monthly basis seems fitting both sides, hawks, and doves, as doves are likely to see euro weakening with such result, something they definitely seem to enjoy.

With EUR/USD trading sideways for almost three months now, it looks like taper announcement this week with doing less for longer is exactly what has been priced in the market. 

Option pricing of the October ECB is getting too expensive and given the recent history of consistent under-delivery of the EUR crosses after the ECB meeting, it is worth of looking for the value in one-month horizon after ECB meeting. 
 

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these securities. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Forex involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility.