QE Program in the Euro Area

October 21, 2016
qe program

The previous week’s number one event was clearly the ECB’s press conference. Euro started its decline against the dollar on the 10th of October and it lasted until the early hours of the European session on Friday. Ahead of the event, the decline was fueled by all sorts of expectations since the market participants were extremely eager to find out if Mr. Draghi is willing to tweak the QE program once more.

During the press conference, the EURUSD was looking for an excuse to keep on moving lower and eventually its wish was granted. At first, it seemed that the “bear party” might be ruined because Mr. Draghi clearly stated that they didn’t discuss any potential changes in the QE. However, when he mentioned that an abrupt ending of the asset purchase program is unlikely, the bears got what they wanted.

In itself, it was slightly surprising that the market took it as “extremely bearish”. The idea that the ECB would simply stop the QE program and go from 80 billion per month to zero just like that, already sounds a bit naive. However, in this case, the prospect of a potential slow tapering, instead of an abrupt stop of the QE program, means only one thing – the asset purchase program will last longer than March 2017.

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Deflation is not an Issue Anymore

The potential extension of the QE program was easily predictable by looking at the overall inflation figures. While the majority of the euro area countries are showing inflation, the overall figure is still very low (0.4% in September). Only two countries, Belgium and Estonia, are currently close to the ECB’s inflation target area but the core members, like Germany, France, Italy and Spain, are still struggling.

ECB’s QE program has been operational since the beginning of 2015. More than a year and a half later, the inflation in the euro area is still almost non-existent. That alone was a big hint that an abrupt ending of the QE program in March 2017 is basically out of the question. It is more or less unrealistic to expect that the ECB would reach its 2 percent target in the next 5 months.

Regardless of the fact that the inflation is still very low, it seems that we have overcome the deflation worries. Out of the 19 member states, only 5 countries are showing negative inflation and one stands at zero (Spain). However, there’s still a long road ahead. For example, if all the negative countries would manage to get their inflation back to 0.0 percent, it would increase the overall average by only 0.1 percent.

High Unemployment is a Problem

In August the overall unemployment rate in the euro area stood at 10.1 percent (8.6 percent in the entire EU). The leading countries were the same as always – Greece (23.4), Spain (19.5), Cyprus (12.1) and Italy (11.4). No doubt, these figures look very bad but we can take it one step further – let’s look at the youth unemployment situation.

It’s no secret that the euro zone’s younger generation is struggling more than ever. The unemployment rate of those younger than 25 years, exploded when the financial crisis started. However, I do have to mention here, that in reality, the figure was already relatively high even before the 2008 meltdown.

Currently, the overall youth unemployment rate in the eurozone stands at 18.6 percent but it gets far uglier when we look at individual countries. Once again Greece leads the way with 50.3 percent, followed by Spain (43.9), Italy (39.2), Portugal (26.3) and France (24.4).

No wonder Mr.Draghi brings up the subject of structural reforms on every press conference.

Trading the Euro in the Near Term

Since we now know what was said, and most importantly, what was NOT said during the previous ECB’s presser, trading the euro might get a little complex. It seems that everyone has agreed that we have a new trend in place and 1.0800 is the next big figure in EURUSD. But in trading, things are never that straightforward and we should be ready for surprises.

If you look for Forex trading explained in details, the web is full of theories that if everyone agrees on something, then the outcome is most likely the opposite. The same threat is currently present in the EURUSD as well. Of course, one cannot take it literally, since we do have exceptions but the threat is clearly there.

All in all, the coming weeks and months are going to be extremely interesting to trade! Good luck!

Capital Properties FX
21.10.2016
Kaarel

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