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ECB reduces QE, but provides no roadmap for ending it


Daily Analysis | 27 October 2017


The ECB kept all three of its policy rates unchanged yesterday, while it announced reductions in the pace of its future QE purchases. Purchases will continue at the current monthly pace of EUR 60billion/month until the end of December 2017. From January 2018, they will continue at a reduced pace of EUR 30billion/month until the end of September 2018, or beyond, if necessary. Policymakers also retained the bias that the programme can be expanded both in terms of size and duration if the outlook becomes less favourable. Overall, this was perceived as a “dovish tapering” announcement, as the Bank did not provide a clear timeline for when asset purchases are likely to end completely, in line with our own view that officials were likely to err on the side of caution. As a result, the euro tumbled on the decision and continued even lower after President Draghi’s press conference concluded.

Looking forward, we think that the euro’s broader direction may depend primarily on the quality of incoming data, as well as the prospect for institutional reforms in the EU, such as the creation of some form of risk-sharing among Eurozone nations. However, with regards to EUR/USD as a pair, its direction may depend to an even larger extent on the USD side of the equation and in particular, the likelihood for US tax reforms, as well as who the next Fed Chair will be.

EUR/USD collapsed yesterday following the ECB decision. The fall came after the pair tested the important resistance territory of 1.1830 and later in the day, it managed to fall below the key support (now turned into resistance) barrier of 1.1660 (R1). In our view, yesterday’s tumble has turned the short-term picture back to the downside. As such, we expect the pair to continue trading lower and it could challenge the 1.1600 (S1) territory soon. A decisive dip below that support may set the stage for more bearish extensions, perhaps towards our next support zone of 1.1490 (S2). Having said that though, given that the ECB collapse appears overextended, we would stay careful of a possible corrective rebound due to some short covering before the bears decide to take charge again. Zooming out to the daily chart, we see that the dip below 1.1660 (R1) may have signaled the completion of a head and shoulders top formation, which may be a medium-term trend reversal sign.


EUR/USD 27 Oct 2017 | Econ Alerts

  • Support: 1.1600 (S1), 1.1490 (S2), 1.1380 (S3)
  • Resistance: 1.1660 (R1), 1.1700 (R2), 1.1730 (R3)


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AUD tumbles on Aussie politics

The Australian dollar tumbled overnight, after news that the government has lost its one-seat majority in Parliament. The High Court of Australia announced that Deputy PM Joyce was wrongly elected in Parliament because he held a dual citizenship, something forbidden under the constitution. This means that Joyce’s seat will be up for a by-election. Even though he, or someone else from his party, could reclaim that seat and thus the Parliamentary majority for his party, we still think that this increase in political uncertainty could keep AUD under pressure for a while, especially following the disappointment in the nation’s CPI for Q3 earlier this week.

AUD/USD traded south on Thursday, falling below the support (turned into resistance) barrier of 0.7690 (R2). Then, the rate dipped below 0.7655 (R1) to stop at 0.7625 (S1). In our view, given the steep tumble following the break below 0.7800, the short-term outlook is negative, at least for now. We would expect a clear break below 0.7625 (S1) to open the way for our next support territory of 0.7570 (S2). Nevertheless, we would stay mindful of a possible corrective rebound here as well, given that the latest tumble looks overstretched.

As for the bigger picture, we believe that the dip below 0.7800 signaled the completion of a double top pattern, which enhances our view that the pair may be poised to trade lower for a bit more. However, bearing in mind that the pair is still trading above the upside support line taken from the low of the 2nd of January, we would get more skeptical on further declines as we get closer to that line.

Riksbank and Norges Bank both stand pat

Both the Riksbank and the Norges Bank kept their policies unchanged yesterday, as expected. Neither of these Banks changed its tone on policy and as such, the reactions in SEK and NOK were muted on these decisions. Interestingly enough, both EUR/SEK and EUR/NOK finished the day higher despite the ultra-weak euro. In our view, this reflects expectations that the Nordic Banks are unlikely to begin scaling back their stimulus in mid-2018 as they currently expect, in an environment where the ECB is still in QE mode.

Today’s highlights:

From the US, we get the 1st estimate of GDP for Q3. The forecast is for economic growth to have slowed to +2.5% QoQ SAAR, from +3.1% QoQ SAAR in the second quarter, something supported by the Atlanta Fed GDPNow model which currently estimates Q3 growth at exactly +2.5% QoQ SAAR. If the actual print indeed meets the forecast, any reaction in the dollar is likely to be relatively limited.


AUD/USD 27 Oct 2017 | Econ Alerts

  • Support: 0.7625 (S1), 0.7570 (S2), 0.7535 (S3)
  • Resistance: 0.7655 (R1), 0.7690 (R2), 0.7730 (R3)




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source: FXGiants

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