The ECB extended its QE purchases by nine months to December 2017, but reduced the monthly purchases to EUR60bn from EUR80bn. The lower pace of purchases followed, according to the ECB, as the risk of deflation has now largely disappeared (the reason why the pace of purchases was temporarily lifted). President Draghi said the nine-month extension followed, as the ECB wants to signal a sustained presence and no near-term tapering.
Draghi expressed a very dovish tone during the Q&A and continued to repeat that tapering had not been discussed. According to Draghi, none of the ECB members want to taper QE, but the main message was a sustained ECB presence in the markets without distortions. Related to this, the ECB communicated additional flexibility in case of a less favourable inflation outlook or a worsening in financial conditions.
The market seemed to 'accept' that the lower QE purchases do not imply the ECB is on a tapering path. This should be seen in light of Draghi's dovish stance including the comments that the new inflation projection is 'not really' close to the 2% target and that the ECB does not have the 'luxury' to consider lowering its purchases further.
In terms of QE restriction changes, the ECB now permits buying bonds with a yield below the deposit rate while the maturity range includes the 1-2y. The ECB has thus not lifted the 33% issue/issuer limit and will continue to follow the Capital Key distribution. On the repo adjustments, the ECB headlines indicate substantial easing - the details are less upbeat.
Looking ahead, we still believe the ECB will announce a third QE extension some time in H2 next year. This should follow as we do not believe inflation will reach a sustained path consistent with the inflation aim before December 2017. Draghi said the inflation projection at 1.7% in 2019 is 'not really' close to the 2% target, implying another extension is likely if the ECB revises its inflation forecast lower again. We still consider the ECB's core inflation projection very optimistic and based on this a lower inflation projection should eventually follow.
The QE extension of EUR60bn for nine months was less than the marke t had expected, triggering a fixed income sell-off. The short-end rallied after Draghi opened the door for the possibility of 'buying below depo'. Overall, the 2/30 in Germany steepened 10bp. The fact that the issue/issuer limit was kept unchanged means purchases in Ireland and Portugal are set to decrease further (deviate more) from what the Capital Key would have suggested. Portugal widened 20bp to core, while the market reaction in Ireland was more muted.
EUR/USD initially bounced on the ECB announcement but fell thereafter when the market realized that the policy change was in a more dovish direction than it initially appeared. At the press conference, Draghi clearly struck a dovish tone, stressing that sustained ECB presence in markets is the main message. Near term, we see EUR/USD in a 1.05-1.10 range with the balance of risks skewed towards a break to the downside. As such, EUR/USD is a sell on rallies within the 1.05-1.10 range. We forecast EUR/USD at 1.05 in 1M and 1.04 in 3M before a sustained move higher to 1.08 in 6M and 1.12 in 12M.
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