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Euro to Weaken Following ECB’s Rates Decision?

The European Central Bank (ECB) has decided to hold interest rates steady, with market participants predicting further euro weakness.

At today’s meeting, the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.40%, respectively. 

The Governing Council says that it expects the key ECB interest rates to remain at present or lower levels for an extended period of time.

“Today’s extension of the ECB’s quantitative easing comes as no surprise, nor does the fairly dovish rhetoric around the risks to European price stability. Last weekend’s Italian referendum result was a timely reminder that political tensions within the Eurozone remain acute and threaten the upbeat tone to recent European data and the stability of the financial sector. The euro looks likely to test recent lows once more,” says Tim Graf, head of macro strategy for Europe at State Street Global Markets.

Likewise, Cosimo Marasciulo, head of European goverment bonds at Pioneer Investments, comments: “As expected, the ECB left the deposit rate unchanged at -0.40%, whilst keeping the refinancing rate also unchanged at 0%. Pretty much everyone in the markets had expected that both rates would be left unchanged, so no real surprise here.”

The ECB also decided to continue its purchases under the asset purchase programme (APP) at the current monthly pace of €80 billion until the end of March 2017. 

It says that from April 2017, the net asset purchases are intended to continue at a monthly pace of €60 billion until the end of December 2017, or beyond if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim.

Mihir Kapadia, CEO and founder of Sun Global Investments, says that, in contrast to maintaining the current interest rates, the decision to begin tapering the APP was a surprise.

“The tapering on its own can be seen as hawkish, but the aspect of extension is dovish. The market seems to be digesting the news and Mario Draghi’s press conference and taking it as negative for both the euro and the bonds.

“While the ECB expects higher inflation into 2017, the important element here is that the central bank has predicted the inflation under 2%, at just 1.6%, which means that the monetary policy will probably remain accommodative for a while,” observes Kapadia.

In contrast, Antoine Lesné, EMEA head of ETF strategy at SPDR ETFs, part of State Street Global Advisors, says that while the decision to extend but taper the APP was expected by the market, it was still “acutely awaited” by market participants.

“Reducing purchases gradually or more abruptly had been floated ahead of the meeting. Given the result of the Italian referendum over the weekend, an aggressive tapering would have been misplaced as political uncertainty continues to plague the Eurozone. Expect the EUR to continue on its weakening trend,” he says.

galen@profit-loss.com   

@Galen_Stops

@Profit_and_Loss

Galen Stops

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