The ECB is Trying to Control QE Reaction
It
is no secret that central banks hate volatility. Whenever possible,
they will go out their way to minimize the market's reaction to big
changes in monetary policy. The European Central Bank is known for
preparing the market for these changes by sending a consistent message
to investors through speeches from policymakers. We know that most ECB
officials believe that it is time to send a strong signal to the market
through large-scale asset purchases and today's leaked proposal will
most likely turn out to be an attempt to prepare investors for the
historic announcement by controlling their reaction. According to
Bloomberg who cites "two euro-area central bank officials," the ECB
plans to spend 50 billion euros a month on government bond purchases
through December 2016 in a program that would exceed 1 trillion euros
and if they are right, the program would be large enough to send stocks
higher and the euro lower. The problem is that the Wall Street Journal,
who cite "sources close to the matter" believe that the program will be
more open-ended with the ECB pledging to buy EUR50 billion every month
for at least the next year. This goes to show how complicated the
decision really is and how many components the ECB needs to consider.
500 billion euros is the number to beat - anything smaller than that
should lead to a short squeeze in EUR/USD. The larger the program the
greater the pressure that it puts on the currency. Based on the latest
CFTC report and the recent price action in EUR/USD, we know that most
traders remain short going into the European Central Bank rate decision.
Smart traders should consider covering part of their shorts ahead of
the ECB announcement because with the bar set high, there is significant
risk of disappointment.
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