EUR spiked initially on the headline announcement that monthly bond purchases had been reduced, only to fall throughout the rest of the session as the full details, and the subsequent press conference, painted a far more negative picture.
EUR/USD was trading at 1.0790 when the announcement that monthly bond purchases had been cut from €80 billion to €60 billion was made. “Machines” had all been pre-programmed to buy EUR on any number below €80 billion, and boy did they buy it. EUR/USD saw a high of 1.0874 within moments. The rationale being that any reduction could be a signal of tapering, a sign of a strong enough economy for the support of QE to be gradually removed.
The devil was definitely in the detail though. The maturity, and yield, of the bonds eligible for purchase had been changed. As ECB president Mario Draghi gave his press conference, the picture that unfolded was of a eurozone economy still reliant on QE for any growth for at least the next 12 months.
GBP
GBP EUR posted a low of 1.1665 and a high of 1.1866. Price action was very challenging with a quick drop off as the euro spiked and then a strong rally to the mid 1.18’s, showing again the value of using market orders to get hedges in place when things are moving so quickly. All eyes now on FOMC next week and how to prepare for it.
USD
The focus will now shift to the Fed’s next meeting on Wednesday. A rate hike of 0.25per cent is priced in at 100per cent by everyone, being only the second time they will have hiked in 10 years.
Even more attention will be paid to the tone of the statement and the “dot plot”, the grid showing the future expectations of interest rates of Fed Committee members. Last year GBP/USD was 1.5200 on the day the FOMC meeting started, a month later it was 1.4150, over 1,000 points lower!
There is virtually no doubt one will see only the second Fed hike in a decade next week. Following Thursday’s “dovish” ECB, the “hawkish” Fed will bring back talk of divergence (rates heading in different directions) between the US and the rest of the world, but most notably Europe and UK. Fed members could show they expect rates to move up further and faster than expectations, which is not priced in.
This would lead to a strong USD rally, a fact to be born in mind in the days ahead when planning for 2017. It’s worth keeping in mind the most difficult days of 2017 could be the last 10 days of 2016.