The ECB’s recalibration of QE purchases for 2018 was as expected: reduced bond-buying to EUR30bn per month for nine months and reinvestment of maturing assets well past the end of QE, according to analysts at ANZ.
“The central bank also updated its forward guidance, which is important for FX markets. At the October meeting, the European Central Bank (ECB) stressed that if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, it stands ready to adjust its QE purchases in terms of size and/or duration.”
“The exchange rate has a large role to play in shaping financial conditions of the region. In its updated macroeconomic projections published in September, the ECB based its inflation projections on a rate of 1.18 for EUR/USD and emphasised that a sustained rise in the exchange rate could undermine the inflation outlook. In part, we feel the latest guidance from the central bank is an implicit signal to FX markets that the ECB has limited tolerance for a much stronger euro. We think the upper tolerance level in the foreseeable future is not much higher above 1.20. Also, the planned extension of QE purchases until September 2018 takes the speculative element of ECB policy settings off the agenda for the FX market for now, with the focus back to the US.”
“Technically, EUR/USD has broken below the 100-day moving average (1.1679), the first time since last March. This also happens to be the 23.6% Fibonacci retracement from the pair’s high in September 2017 (1.2092) to the low in January 2017 (1.0341).”
“In terms of positioning, we are also wary that the market is caught long in the EUR. CFTC data showed that leveraged accounts’ net long EUR positions are close to the highest in three-and-a-half years.”
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