Strong Euro Puts QE Tapering in Doubt

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On the Euro front, the consensus seems to lean towards expecting a symmetric risk for the Euro in reaction to how President Draghi might refer to the signal currency's recent appreciation pace if any. On the Euro front, BofAML argues that Draghi can not avoid talking about the Euro in this meeting.

Sterling also came off its highs when the USA dollar recovered and with no economic data on the calendar, the currency's flows were driven entirely by the market's appetite for US dollars and euros. Obviously, Berlin doesn't mind coping with a more expensive euro, expecting more gains from higher interest rates, thanks to its colossal reserves and surpluses.

The impact of the ECB's corporate bond buying is most obvious when you compare companies eligible for the program to ineligible peers. "These remarks can influence FX markets to some degree", NAB argues.

Still, ECB comments will be scrutinized for any clues on the timing and scale of a taper.

The ECB's Corporate Sector Purchase Programme (CSPP) has also blunted the yield spread between investment- and speculative-grade debt. The 1.20 could be an interesting top for tactical sales and pressure the EURUSD toward 1.1715 and 1.1495, the minor 23.6% and the major 38.2% retracement on April - September rise respectively.

Many analysts now suggest that the European Central Bank will make comments on the Euro's strength during this week's meeting and will not announce its QE plans until October.

Even if there are those in the European Central Bank who might argue that better-than-expected economic data would offset some of the energy and Euro impact on inflation, the doves will likely use the forecast as a strong argument for extending QE. While the revision seems widely expected, its size introduces symmetric risks for the Euro. As we outlined earlier in the week, we think that risks to the Euro are skewed to the downside ahead of the meeting. That also takes place against the backdrop of the rise in the euro, which has strengthened some 13 percent against the dollar year to date. That, we think, won't stop FX investors from worrying about potential commentary pushing back against Euro strength, therefore we think EURUSD will remain range-bound into Thursday' meeting. Economists widely expect a further upgrade to the growth outlook but yet another trimming of the inflation projections. They also expect that a modest tapering would only start in January after the end of the on-going round of asset purchases. As such, the ECB injects liquidity into the financial system and aims to boost the economic growth and the inflation toward the bank's 2% mandate target.

A stronger euro though will undermine ECB's main task of bringing inflation towards the set target of close to 2%.

UBS's official expectations are for a cut to €40bn month purchases at the 26 October meeting, decision and then a further taper to €20bn in March 2018, "before the eventual culmination of QE in Jun-Sep, equating to an additional aggregate purchase of Euro 180-210bn", says Siegenthaler.

The Japanese yen was little changed, gold held firm to trade near its highest level in almost a year on safe-haven demand and copper hovered near three-year high on expectations of solid economic growth in China, while crude oil prices traded mixed amid easing supply concerns.

European stocks peaked at a two-year high in May, and the pan-European STOXX 600 equity index has fallen by around 6 per cent since then, with euro zone stocks shedding a similar amount.

'The ECB's update of their forecasts will be very important for gauging the likely evolution in policy.