The EUR/USD is getting a bid on breaking news from the FT on a leaked draft of the communiqué for next week’s EU Summit (DEC 18/19). The draft (reposted below) would suggest that:
- The European Council seeks greater coordination (which is to say agreement) with all member states and policy heads on economic policy, before “new” policy is issued
- The meeting to discuss “agreement” is not planned until the February (12/13) Summit and could be pushed out to as far as June
Whether or not Draghi and the ECB can legally act as a lone wolf in issuing policy is still not completely understood, yet this communiqué signals to us an even higher probability that the ECB does not issue sovereign QE when it next meets in January. This should support the EUR/USD (see our quantitative levels below).
Remember that both ECB President Draghi and his VP Constancio targeted the potential for QE policy in the first quarter of 2015. (Also see our recent note Draghi Didn’t Deliver the “Drugs”!)
We suspect that the Bank will be testing the waters, certainly politically as Germany has raised a giant red flag against such a QE move, while it assesses: 1) the deterioration in economic fundamentals and 2) the inability of its concurrent programs (TLTRO, covered bond and ABS purchases) to support or inflect existing depressed conditions, as it seeks to attain greater economic policy coordination across all relevant parties.
Closer coordination of economic policies is essential to ensure the smooth functioning of the Economic and Monetary Union. Work on the development of concrete mechanisms for stronger economic policy coordination, convergence and solidarity is being taken forward. Heads of State or Government will exchange views on these matters at their formal meeting in February. The President of the Commission, in close cooperation with the President of the Euro Summit, the President of the Eurogroup and the President of the European Central Bank, will report at the latest to the June 2015 European Council.
Matthew Hedrick
Associate