ECB unlikely to begin QE in today's meeting

Fundamental View

Yesterday we saw several pieces of US data print; ADP employment change read slightly lower than expected with 208k against the expected 222k. Although lower it was within analysts’ expectations and above the 200k mark so there was an understandable lack of trading activity from the number initially. We also maintain our “inline/higher” outlook for Non-Farm Payrolls during tomorrow’s session in light of this. The ADP reading is also important as it reflected a ‘Goldilocks’ number; a lower than expected but above 200k number saw a lull but a pickup in activity going through cash-open and into the close. The S&P 500 made a new all-time high yesterday as the number was high enough to warrant bullishness but low enough to discount rate-hike announcements in the near term.

Today’s View

Today is arguably one of the most important days of the financial calendar this month. With three monetary policy events on the horizon it will be slow going until around 12pm. With the Bank of England Monetary Policy Committee first in line we see a no change in rates. At 1245 we have the ECB rate decision, again expected to be unchanged; this is due to commentary last month that the “ECB’s interest rates are already at their lower bound” and the subsequent implications that the interest rate ammunition has been expended. The main event will be Draghi’s press conference at 1330 where we will see his statement, any additional comments and also a Q&A session. This will be where the language regarding Quantitative easing will be analysed and whether the ECB will action any further asset purchases. It is, however, unlikely that the ECB will begin QE this meeting, despite a number of analysts estimating this. This is due to the fact that we have the second tranche of TLTRO next week and continued ABS and Covered Bond purchases already in motion. The ECB are likely to reiterate language which calls for patience to see whether these policy measures have fully fed through to the system before assessing if they require the expansion to the balance sheet. This may seem surprising as we already had Draghi up the dovish rhetoric on the 21st of November, sparking a 1.3% sell off in the EURUSD on the day. This was due to this not reflecting the views of the entirety of the Governing Council and so much of the hawkish undertone presented by the ECB were likely to have been omitted. In the very unlikely event of a QE announcement today, we expect the EURUSD to reach 1.2050 as the double bottom of 2012 but as aforementioned this is an unlikely outcome to this meeting. There is likely to be some disappointment as we see Draghi speak with less dovishness due to the Governing Council’s involvement and therefore a slight pullback in the EURUSD could be seen. We encourage traders to remain conservative with their entries on the EURUSD this afternoon.

Alternative View

With all focus on the ECB press conference today we strongly advise that traders remain conservative and reactive whilst trading this afternoon. Please maintain good risk management practice