EUR/USD: ECB extends QE, but at reduced pace

• The ECB decided to extend its asset purchases from March 2017 until December 2017, but – and this is the main news – at a reduced pace of EUR60 billion per month. This comes as a surprise, because the ECB had committed to keeping the current pace of EUR 80 billion until they see “a sustained adjustment in the path of inflation consistent with the Governing Council’s inflation aim”.

• The cut in the volume of monthly assets buys suggests a concession to conservative countries such as Germany and the Netherlands.

• ECB President Mario Draghi said: “The key message... is to show that there is no tapering in sight, to show that the ECB is going to stay in the market, to show that we will continue to exert pressure on market prices.”

• The ECB’s new macroeconomic forecasts show limited changes compared to September, although they reveal a slightly more sanguine growth assessment, including in regard to “indications of a somewhat stronger global recovery”. This is reflected in a 0.1 percentage point increase in the GDP forecast for 2017, now seen at 1.7%, while 2018 remains at 1.6% (a similar pace is expected in 2019). In our view, the most notable revision is downwards and refers to core inflation, now seen at 1.1% in 2017 (from 1.3%) and at 1.4% in 2018 (from 1.5%), with 2019 expected at 1.7%. For 2019 as a whole, headline CPI is forecast at 1.7%, a level that Draghi describes as “not really meeting goal”.

• The European Central Bank's decision to extend its debt-buying programme even as it cut the size of its purchases disappointed EUR/USD bulls. Our long position was stopped with a small profit. The scale of the EUR/USD drop is surprising when we realize that the decision reflects a compromise where the hawkish camp prevailed.

• The focus turns to next-week Fed meeting now. The possibility of the Fed hiking interest rates next week has been almost fully priced in by the market, and the focus is now on whether the U.S. central bank hints at further monetary tightening in 2017.

• The technical situation is unclear and the EUR/USD outlook is mixed. Long tail on Monday’s large candlestick line signaled a massive rejection of the downside, but this has subsequently been overwhelmed by the rejection of the upside on Thursday. What is more, next-week Fed statement is another source of uncertainty. We think no position is justified from the risk/reward perspective.

GBP/JPY: Buy on dips strategy remains intact

• On Tuesday the Office for National Statistics said it had made major errors in the calculation of Britain's trade deficit between January 2015 and September 2016, due to a misclassification of figures it had received on the trade in gold.

• While the error meant Britain's record current account deficit was a bit smaller than thought in 2015 and early 2016, Britain's trade deficit in the three months after June's vote to leave the EU ballooned to GBP 14.9 billion.

• On Tuesday the Office for National Statistics had said corrections to the data pointed to a deficit of as much as GBP 17 billion - which would have been the largest on record - but other revisions incorporated in Friday's data release brought it down. Friday's data showed the trade deficit in October alone narrowed to GBP 1.971 billion from GBP 5.812 billion in September.

• But in percentage terms, goods export volumes in the three months to October declined by 2.1% from the previous three-month period while imports grew 4.4%, suggesting sterling's sharp fall since June's Brexit vote is doing little to improve the country's balance of trade.

• The ONS said the revised trade data for the three months to September would not affect headline economic growth during that period. Previously, the statistics agency said net trade had given the biggest boost to growth since early 2014.

• Construction figures showed output in the sector dropped by 0.6% mom and was up by 0.7% yoy in October compared with market forecasts for a 0.1% annual decline.

• Sterling nudged up to a day's high against the USD on Friday after data showed Britain's trade deficit narrowed more than expected in October. The near-term GBP/USD trading has definitely been bearish, but the positive alignment of the tenkan and kijun line highlights the overall bullish bias. We stay sideways on the GBP/USD due to elevated risk ahead of next-week Fed meeting. But our constructive view on the GBP is reflected in bullish GBP/JPY strategy.