Before looking at the future, let’s quickly review the recent past.
In January the ECB announced that from April 2017 APP would decrease from €80 billion to €60 billion until the end of December 2017.
EURUSD consolidated during February and then started its bullish trend in March which continued in April when the ECB did what they said there were going to do at the January meeting. At no point did the ECB elude to the APP program ending in December and all meeting statements have always stated that ECB interest rates are “to remain at present or lower levels for an extended period of time, and well past the horizon of the net asset purchases.”
At the October meeting, the ECB announced that APP would be cut in half from January 2017 to €30 billion until the end of September 2018 and QE is set to continue until the Governing Council see a sustained adjustment in inflation towards the 2% inflation target. Based on the market’s reaction to the news it does seem that there was an expectation for the ECB to announce a date for the end of APP. When we didn’t get this the market started unwinding this pricing in – classic buy the rumor, sell the fact.
Buying less bonds means yields higher and a decrease in money supply due to €30 billion less being injected into the economy via APP. Money supply down, demand the same, value up so therefore bullish for the Euro. The question is, when will Bulls get back in – perhaps when they see inflation data indicating a sustainable return to the 2% target and therefore an end to APP on the horizon OR maybe after the December meeting.
If you look at the COT report you will notice that the recent drop in EURUSD is not due to new Bears entering the market, it’s due to Bulls taking profit. You will also notice that EURUSD is still NET bullish.
As far as data is concerned, retail sales YoY has been declining over the past three months with the October release for August 2017 coming in at 1.2% vs. projected 2.6% and 2.3% in July (a drop from 3.1% in June). The flash estimate for consumer prices came in at 1.4% which was below the 1.5% in the previous two months. We get the final reading on the 16 November, a day after US retail sales and inflation data. Annual core inflation is expected to fall to 0.9 percent from 1.1 percent in September, which will be the lowest in five months.
Low inflation data could result in further profit taking as it may indicate QE for longer. If the market is expecting these low results, then will the Euro break the current bearish trend heading into these releases? Probably not.
Based on my fundamental and technical analysis of the US Dollar, it is very possible that Dollar is weak next week though as mentioned in that fundamental USD review for November, if retail sales and inflation data for the US came out positive on the 15 November then we would see Dollar strengthen which will move EURUSD lower. If those results are followed by lackluster inflation results out of the Eurozone on the 16 November, as forecast, we will be in a good trade already and in fact, if everything goes as planned, this may be a trade worth holding as we head into ECB meeting in December.