Don’t assume the euro will rally when the ECB makes its expected “hawkish” announcement of QE taper plans, according to Bloomberg FX commentator Vassilis Karamanis. In fact, there’s an argument for the opposite occurring. Karamanis explains why the most anticipated move in the markets on Thursday may again be a fade.
Euro Bears May Get Their Chance When Draghi Speaks: Macro View
Policy makers have done a very good job communicating their plans since the idea of a taper first caught traders’ attention. The consensus case is now for the ECB to signal a nine-month extension to its asset-purchase program at a reduced pace of around 30 billion euros a month.
Unless Mario Draghi sounds hawkish (by not talking down the euro or by suggesting interest rates will rise soon after the end of QE), euro bears could take it as a signal to chase a move toward October lows.
The joint currency’s volatility skew shows traders are positioned for a hawkish announcement, but downside risks remain.
Higher-than-anticipated monthly purchases are expected by some analysts, while even a lower number — mainly due to bond scarcity — could be accompanied by a 12-month extension, pushing an interest-rate hike even further out the curve.
Policy makers have been clear that they don’t want any abrupt euro strengthening. And haven’t been shy about verbal intervention whenever it’s risen above $1.20.
They’ve succeeded. Realized volatility in the euro dropped to a three-year low, and EUR/USD has failed to hold above $1.20. Draghi may see few reasons to change this well- tested recipe.
Rather than signal the start of a fresh euro rally, a move toward $1.20 might actually offer a good opportunity to initiate shorts on a risk-reward basis.
The environment since mid-September has become more dollar- supportive and where euro goes next isn’t just an EU or ECB thing. Dollar technicals have now turned bullish, while developments in Washington are no longer weighing on the greenback.
That said, on a medium- to long-term perspective positioning for a stronger euro makes sense. The recovery of the euro area is solid and the ECB will eventually signal that interest rates can rise and that the currency at higher levels won’t damage the economy as much.
In the short-term, an ECB decision and rhetoric that stays in line with market expectations may be only negative for the common currency when knee-jerk moves are out of the way.