ECB summary and implications for EUR/USD


Staff member
Without bragging too much, I'm happy to say Mario Draghi delivered most of what I had expected at today's ECB policy meeting, and more:
  1. Cut in the deposit rate by 10 basis points to -0.5% from -0.4%.
  2. Introduction of a two-tier system that exempts part of banks' excess liquidity from the negative deposit rate.
  3. Restart of its bond buying programme, i.e. quantitative easing (QE). Net bond purchases will begin in November and total €20 billion per month.
  4. Change in forward guidance: There is no set end date for the stimulus measures. QE is planned to last until the first rate hike. Rates will stay low until we see inflation "robustly" higher.
  5. Changes to targeted longer-term refinancing operations (TLTRO): This came as a surprise on top of the above measures, indicating Draghi wanted to get his bazooka out. Interest rates on TLTROs were lowered and eligible maturities lengthened to 3 years from 2 years previously.
When the news came out that the ECB governing council had decided to cut the deposit rate to -0.5% and to restart QE, EUR/USD initially shot up from 1.1025 to 1.1070 but then quickly fell to 1.10. It kept sliding during the press conference, finding a low at about 1.0925. It was then that Mario Draghi said monetary policy could only go so far and that it was now up to fiscal policy to step things up. Some market participants interpreted this as a tip of the hat to Christine Lagarde and national governments in the eurozone: If you don't want interest rates to stay negative, do something about it so we don't have to keep them low. Consequently, EUR/USD began to pair its previous losses, going as high as 1.1087 on Thursday evening. That move was largely in line with my expection from yesterday.

But where will EUR/USD go from here? The narrative hasn't changed much, in my opinion. At the end of the day, the ECB met expectations, slightly underdelivering on QE (€20bn vs. €30bn expected) and overdelivering on TLTRO. Neither NIRP nor QE have pushed inflation significantly higher so far. Rates are likely to stay low for quite a long time and the ECB has already made extensive use of its policy toolbox. I think the focus will quickly move to the Federal Reserve, whose upcoming FOMC decision will be next week on Wednesday, 18 September. The Fed's remaining firepower is bigger than that of the ECB. Although Powell will be inclined to showcase the central bank's independence from politics, Donald Trump pushes the Fed towards a preemptive rate cut - not by tweeting about it, but by keeping the trade war with China and other large trading partners going.

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Source: Bloomberg, Data as of 12 September 2019 21:48 Frankfurt time.

The downward trendline in EUR/USD from above 1.15 in November 2017 has now held four times; two times alone in August and September 2019. Although there is a resistance area around 1.11, I still see more risk of a move higher than a lasting move lower in EUR/USD. Dips below 1.10 have repeatedly been used to sell US dollars. Moreover, I believe traders will be careful not to build too large USD long positions ahead of next week's FOMC meeting. Hence I would expect EUR/USD to consolidate in the 1.10-1.12 range until Wednesday. Depending on the news we will get until then, the pair might briefly trade outside of that range, but as of today I see no reason for a significant move in either direction or a spike in volatility.

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Source: Bloomberg, Data as of 12 September 2019 22:12 Frankfurt time.