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19 May 2015
ECB talking down euro? – Rabobank
FXStreet (Barcelona) - With ECB member Coeure mentioning that the ECB intends to increase its QE purchases in May and June, Jane Foley, Senior Currency Strategist at Rabobank, explains the risks of bringing forward their asset purchase program, and further forecast EUR/USD at 1.05 by 2015-end.
Key Quotes
“Towards the end of last year, it became clear that the ECB was winning the currency war as President Draghi whipped the market into a frenzy of anticipation ahead of the central bank’s QE announcement and the fall in the value of EUR/USD began to pick up momentum.”
“Even though the ECB do not target the EUR, it became very likely that a weaker EUR was a key part of central bank’s assault on deflationary risks and part of the reason why the ECB has started to claim that it policy is beginning to show signs of success.“
“While the ECB may be willing to tolerate a moderate pullback in EUR/USD, it is likely that any extension of last week’s high at 1.1467 would not be welcomed. At the end of last week Draghi pushed back by warning that the ECB’s QE policy will be implemented “in full”. However, in the face of weak US data releases, the impact of Draghi’s remarks was limited.”
“This morning ECB member Coeure has stated that the ECB intends to increase its purchases of Euro-area assets in May and June ahead of an expected low-liquidity period in the summer. This remark has had a powerful impact in undermining the value of the EUR today.”
“The downside of bringing forward some of its asset purchases, is that the ECB could be faced with rise in the value of the EUR during the summer months. By then it is widely assumed that the US recovery would have regained traction and this in turn will feed expectations that a US rate hike may be just around the corner.”
“We maintain our long held view that the Fed is likely to hike rates in December. Assuming US data releases continue to support this view, we would expect the divergence of policies between the Fed and the ECB to allow EUR/USD to move moderately lower in the coming months.”
“We maintain our view that EUR/USD will edge towards the 1.05 area by the turn of the year before stabilising in 2016 as the market begins to look ahead towards the end of the ECB’s asset purchases programme.”
Key Quotes
“Towards the end of last year, it became clear that the ECB was winning the currency war as President Draghi whipped the market into a frenzy of anticipation ahead of the central bank’s QE announcement and the fall in the value of EUR/USD began to pick up momentum.”
“Even though the ECB do not target the EUR, it became very likely that a weaker EUR was a key part of central bank’s assault on deflationary risks and part of the reason why the ECB has started to claim that it policy is beginning to show signs of success.“
“While the ECB may be willing to tolerate a moderate pullback in EUR/USD, it is likely that any extension of last week’s high at 1.1467 would not be welcomed. At the end of last week Draghi pushed back by warning that the ECB’s QE policy will be implemented “in full”. However, in the face of weak US data releases, the impact of Draghi’s remarks was limited.”
“This morning ECB member Coeure has stated that the ECB intends to increase its purchases of Euro-area assets in May and June ahead of an expected low-liquidity period in the summer. This remark has had a powerful impact in undermining the value of the EUR today.”
“The downside of bringing forward some of its asset purchases, is that the ECB could be faced with rise in the value of the EUR during the summer months. By then it is widely assumed that the US recovery would have regained traction and this in turn will feed expectations that a US rate hike may be just around the corner.”
“We maintain our long held view that the Fed is likely to hike rates in December. Assuming US data releases continue to support this view, we would expect the divergence of policies between the Fed and the ECB to allow EUR/USD to move moderately lower in the coming months.”
“We maintain our view that EUR/USD will edge towards the 1.05 area by the turn of the year before stabilising in 2016 as the market begins to look ahead towards the end of the ECB’s asset purchases programme.”