Morning Market Update – ECB in Focus

USD weakness account to EURO’s gains for almost 50% but the other 50% is contributed by the market speculating the ECB to trim its QE program this year. Draghi has been supporting the QE by appreciating its effects on the economy and warns of the consequences in case of tapering the program. The markets were more focused on a date to trim the QE program ignoring the caution side of the speech and pressed Draghi only to get an answer that policy makers will discuss “during the fall”.

EUR has remained strong since the start of this year. Draghi doesn’t like this, but his talks to downplay the currency hasn’t worked. The poll out from reuters on August 28th shows that 46 economists out of 66 expect the Central bank to announce a change this October, while the same economist had a different view. During the last poll, more than 50% of the economists expected for a taper announcement this September, but that number is changed now and only 15 economist expect for an announcement today.

EUR/USD has been exhausted in the recent past and the major outlining factor is the push in Taper expectation from September to October. ECB has slowed its purchase from 80 to 60 billion euros since March and reuters poll shows that most expect for a cut from 60 to 40 billion euros. If ECB decides to cut 20 billion and makes  40b for H1 18 then it clearly suggests that the purchase will continue into H2. If ECB cuts 30 billion euros making the purchase to 30, then it speaks clearly that officials have an upper hand to end QE by the mid of next year if they decide to do it.

Something of this sort will be good for Euors and bad news for Draghi who considers that EUROS has over shot and is not happy about strong Euros. The banks are also concerned about the increase in exchange rates.
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