ECB Review: EUR/USD drops on ‘dovish QE taper’

ECB kept key rates unchanged today, but announced following changes to extra ordinary/unconventional measures –

  • The maturity of the QE program has been extended to end 2017
  • Bank would trim monthly bond purchases by EUR 20 billion to EUR 60 billion from April 2017 till end 2017
  • Will continue to buy EUR 80 billion worth of bonds per month till April 2017
  • Will buy bonds below the deposit rate

Dovish Taper

The EUR/USD pair rose to a high of 1.0873 in a knee jerk reaction to trimming of bond purchases.

However, the currency quickly surrendered gains and was last seen trading 1% lower on the day around 1.0646.

This is because – the central bank has merely made the QE ‘thinner for longevity’. What it essentially means is that the ECB balance sheet would continue expand throughout 2017… a time when the Fed is seen raising rates faster than previously expected.

No wonder, the EUR/USD dropped 1%.

QE till infinity

Furthermore, the bank is now ready to buy bonds yielding less than the deposit rate which means the QE could effectively run till infinity.

Also note that with this style of spreading purchases over the longer period of time, the QE program could run for years to come.

In my opinion, this is a ‘Dovish Taper’ and has effectively opened the doors for a sell-off in the EUR/USD pair to parity levels by Q1/Q2 2017. The only thing that can support EUR going forward is massive risk aversion in the financial markets.

EUR/USD – Falling tops formation remains intact on the daily chart

eurusd-daily

Source: Netstation (www.netdania.com)

Today’s candle is highly bearish; although I would want to see a bearish follow through and a break below March 2015 low of 1.0463.

On the weekly chart

eurusd weekly.jpg

Source: Netstation (www.netdania.com)

Watch for a close below the Flag support (floor)… Bearish flag is a continuation pattern and a close below the flag support (floor) would signal that the retreat from the May 2014 high of 1.3993 has resumed.

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