EUR: Hawkish message contained in the ECB’s policy announcement - Rabobank

Jane Foley, Research Analyst at Rabobank, suggests that Draghi’s dovish tone and extension of the ECB’s bond buying programme until the end of next year managed to counter much of the disappointment that the ECB will from March reduce the amount of the monthly bond purchases, Rabobank would still argue that there is a hawkish message contained in the ECB’s policy announcement. 

Key Quotes

“If the ECB had continued to buy assets at a pace of EUR80 bln until next September, any reduction in the pace would have been postponed until at least October.  As it stands the reduction in the pace of asset purchases will commence next April.”  

“Irrespective of the debate about whether or not the ECB has tapered, Draghi was ultimately successful in making sure that the market has been made aware that the ECB will be heavily involved in asset purchases at least to the end of last year.  Interestingly the extension of policy until December means that the ECB may not need to make another meaningful policy decision until after the German election next autumn.  This provides a signal to the market that there should be plentiful cheap money to soften the impact of political uncertainty throughout next year’s heavy election schedule.  Political events threaten to increase market volatility next year, but ECB activity should provide some comfort.”  

“As the dust settle over the debate about what constitutes a tapering, attention is set to turn its attention towards this week’s Fed meeting.  Futures suggest that the market is 100% confident of a Fed move.  So, with a 25bps rate hike priced in, the market is likely to take its direction from the guidance offered by Fed Chair Yellen rather than from the policy announcement.   On the back of the Trump Presidential election victory, hopes for reflation in the US have seen a significant boost.  However, we would expect Yellen to be anxious to avoid a repeat of the H2 2014 scenario when heightened expectations of Fed rate hikes in 2015 led to a significant surge in the value of the USD - which ultimately reduced the need for policy tightening. Another factor which could restrain Yellen’s optimism is the confined nature of US wage inflation.”

“Last release of US November Labour data produced a disappointing -0.1% m/m outcome for hourly earnings.  Meanwhile, hours worked have not made much progress since 2013 and real household income growth has been soft for decades for all but the highest paid.  This backdrop suggests that demand growth is still likely to be confined.  It is our forecast that once again the Fed may only hike rates once in 2017.  This could disappoint current market expectations and led to an unwinding of some of the recently created USD long positions.  On the assumption that populist parties do not prevail in next spring’s Dutch and French election, we are forecasting EUR/USD at 1.10 on a 12 mth view.”