ECB President Mario Draghi once again is talking down the EUR/USD – this time in a New Year’s interview with the German newspaper Handelsblatt that further hints that the Bank may issue QE.
While the market is selling the EUR/USD to levels not seen since 2010, Draghi’s timing of QE still remains vague and undecided. He states that the risk to price stability is higher now than 6 months ago– but is this a surprise? NO: the ECB has been unable to revert deflation over the past 18 months and the massive move in energy prices (oil is down -39% over the last 3 months) has completely caught the Bank’s economic and inflation predictions off guard.
As we approach the ECB’s next policy meeting on 1/22, our call hasn’t changed. We expect Draghi to continue to talk down the EUR/USD (etf FXE) through the prospect of QE. The cross remains broken across our TRADE, TREND, and TAIL durations.
On QE timing, we continue to expect louder opposition from the Germans (in particular) against QE which may well extend out the prospect of a potential issuance (late last year the Bank target a Q1 arrival). Just today we received comments from a senior member of Merkel's party, Michael Fuchs, who warned against the ECB pouring money into struggling Eurozone states through bond purchases as this would reduce pressure on them to enact much-needed reforms.
We continue to warn not to confuse Draghi’s policy to inflate with economic growth and believe our Q4 macro theme of #EuropeSlowing remains intact. Eurozone PMI Manufacturing figures for December were released today –they are ugly on an absolute and rate of change terms basis (see chart and table below).
Based on our proprietary GIP model, we expect slowing in the region until at least Q3 of this year, and continue to call for a negative divergence from France (etf EWQ) that delivered a PMI of 47.5 and remains anchored well below the 50 line indicating contraction.
Happy New Year and enjoy the weekend!
Matthew Hedrick
Associate
