Comment: What could the ECB minutes do to the euro?

By Ipek Ozkardeskaya, senior market analyst at London Capital Group

The European Central Bank (ECB) will release minutes from its December meeting on Thursday, which are expected to reveal an in-depth insight into the sentiment at the heart of the committee and economic projections that influenced the decision.

The ECB is not tapering

At the December monetary policy meeting, the ECB announced the decision to reduce the monthly asset purchases from 80 to 60 billion euros on the back of the economic recovery and signs of rising inflation. The ECB’s Quantitative Easing (QE) programme was extended to the end of 2017, from March 2017 set previously.

Nevertheless, the accompanying statement remained comfortably dovish. President Mario Draghi insisted that the reduced monthly purchases did not mean tapering, as the QE programme could be extended beyond 2017. As of today, the overall size of the programme is unidentified.

What to watch?

The main highlight will be the discussions around the decision to reduce the amount of monthly asset purchases.

How hawkish, or dovish were the ECB members? How does the Committee see the future of the QE programme? What is the inflation outlook for 2017/2018.

The sentiment that underpinned the December decision is important, given that the position of the decision makers will define the future of the Eurozone’s monetary policy.

ECB doves could remain in charge

It is important to keep in mind that the ECB had little margin for manoeuvre in December. Given that the amount of eligible bonds shrank to significantly low levels through the duration of the ECB’s QE programme, the bank needed to reduce the size of its programme in order to give it a longer life.

The ECB took a straightforward decision to extend the QE programme by an additional nine months involves more asset purchases. And although the decision to reduce the amount of monthly purchases by 20 billion euros was first confusing, the QE programme is now open-ended.

Doves remain in charge of the euro markets

This decision revived the ECB doves going into the end of 2016.

Investors continued buying Eurozone bonds following the ECB decision, yet the appetite deliberately failed. German 10-year yields bottomed at 0.17% by the end of December then picked up to 0.30% in January. In a similar way, French 10-year yields rebounded from 0.65% to 0.83% over the same period.

The euro is expected to remain under decent selling pressure against the US dollar.

The divergence between the Federal Reserve, which aims to hike the Fed funds rate three times in 2017, and the European Central Bank is supportive of further euro depreciation in the medium term.

Mid-term EURUSD bias is negative

The EURUSD is currently paring losses. Surpassing the 1.05 level encouraged a further recovery in the euro against the greenback.

The key mid-term resistance stands at 1.0706, the major 38.2% retracement on November 8th to December 2nd decline.

The latter period is interesting, as the market pricing incorporated the hawkish shift in the US monetary policy amid Donald Trump’s victory in the US presidential election and the ECB’s decision to deal with its QE programme, which was due to end in March 2017.

Below 1.0706, the mid-term bias remains negative.

The EURUSD could resume its descent towards the 1.0400/1.0350 area. As of today, parity is still a long-term reverie.

However, surpassing 1.0706 should suggest a mid-term bullish reversal and bring the 1.10 level back on the radar.