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In today's ECB meeting Mario Draghi will give more details on the ABS program and covered bond purchase programme, as this has been already announced in September meeting. Also in regard to the TLTRO, ECB will be in waiting mode and wait for the December auction in order to asses the success of the programme so it may be the case there will be no new step taken, this year, towards QE. but this is just my assumption and interpretation of current data and anything can be possible. Right now it's still premature for the ECB to engage with QE programme but we can expect for ECB to keep the door open for QE only if markets demand so. With that in mind we can expect a dovish tone from ECB as it still has to fight a prolonged low inflation.
Don't expect any further cuts in the ECB policy rates as Mario Draghi has clearly stated that ECB has reached the lower limit with MRO at 0.05% and Deposit rate at -0.2%.
However even thought ECB can be dovish it may be not enough to keep the pressure on EUR/USD as the market may be disappointed of ECB reluctance to engage in QE programme right away and it could sent EUR/USD in a short lived rally. The market have been running well in advance projecting this expansion in ECB balance sheet (see Figure 1) as ECB have said they are targeting an increase to match where they where back in 2012.
Figure 1. EUR/USD vs ECB balance sheet (inverted)
The ECB balance sheet is a reflection of ECB stimulus in the system so this means ECB have to inject between $600B-$1T to match the level from 2012, so if we don't get to that point the market may be disappointed as it already gone well in advance projecting this kind of stimulus and we may be due for a correction, but not altering the current EUR/USD bearish trend.
Best Regards,
Daytrader21
