EUR tumbles as Draghi stands ready

• ECB commits to extend QE programme beyond March 2017, albeit at a slower pace
• EUR tumbles as Draghi stands ready to adjust stimulus
• Focus shifts to one of the last risk event of the year; the Fed

via Barclays

Markets saw fixed income yields and equities soar yesterday, whilst our traders noted one of the highest trading volume days of the year for EUR. The ECB’s announcement to continue buying assets under its QE program after March 2017, but at a reduced pace, prompted EURUSD to trade a high of 1.0875 (Bloomberg) before reversing sharply as a dovish Draghi took the stage. He added that if the outlook turns less favorable, the Governing Council “…intends to increase the program in size or duration…”

From April 2017 until the end of December 2017, the ECB will buy EUR60bn of assets per month, compared with the current rate of EUR80bn. The central bank also said the programme may be extended beyond the end of 2017 if necessary. With the ECB’s inflation forecast for 2019 still below the 2% target at 1.7%, Barclays Research “…thinks the ECB will need to continue buying in 2018 because inflation dynamics are not yet self sustaining without QE…”

With tweaks to the technical parameters, the ECB removed the yield floor and said they will buy European government bonds maturing between 1-2 years (making bonds maturing between 1-30 years now eligible for purchase)

Elsewhere, CNY weakened to above 6.90 vs. USD after PPI inflation surged to 3.3% in November (1.2% in October), the largest increase since January 2010. CPI inflation continued its upward trend in November, edging up to 2.3% y/y (2.1% in October)

With the ECB likely to remain on the sidelines over the next few quarters, market focus turns to one of the last risk event of the year; the FOMC meeting (next Wednesday). With the Fed almost certain to hike, the key is question is whether the Fed will convey greater confidence or even increase its guidance on the pace of hikes, given recent developments

Todays’ currency rates: