Investment Conclusion: Short EUR/USD (FXE)
At today’s meeting, ECB President Draghi left the key interest rates and the asset purchase program (QE) size unchanged, and reiterated last month’s language that the ECB is “if needed, ready to increase the asset purchase program in terms of size and/or duration” – all in-line with consensus.
QE is not dead! Our position remains counter to consensus: we believe Draghi will have to lengthen the duration (and potentially increase the amount of QE) as our proprietary GIP (growth, inflation, policy) model sees a QUAD 4 set-up (growth slowing as inflation decelerates) for the Eurozone in the back half this year (chart below). Consensus expects a QE taper to come at the September 7th meeting and isn’t forecasting growth and inflation slowing in the back half of 2H 2017.
Specifically on inflation, today Draghi said “inflation is not where we want it to be”. As you can see from the CPI chart below, after peaking at 2.0% in February of this year, inflation has ticked down to the most current (JUNE) level of 1.3% Y/Y. How may Draghi inflect that red line to get to the Bank’s target rate of 2.0%? Increase the duration and/or size of QE to ‘attempt’ to reflate inflation, the broader economy, and the markets! But will he do it? We think he’ll be forced to as slowing growth and inflation data rolls in in September!
EUR/USD Quantitative Set-up:
Given our ECB policy view to extend/increase QE and our QUAD 4 view, we continue to recommend shorting the EUR/USD. We signaled such a move in Real Time Alerts (via the etf FXE) at $1.15 on Tuesday (7/18). See our immediate term TRADE and intermediate term TREND levels in the chart below.
For more detail on our contrarian call on European equities and the Euro see our #EuropeSlowing? theme in our Q3 Macro Themes call (a replay of our 6/30 call for subscribers can be found HERE).
As we roll into the heart of the European summer vacation (August), be mindful of the remaining ECB Meetings in 2017: September 7, October 26, December 14.
