ECB Sovereign Bond Purchases to Start March 9th

Market Trends - 05/03/2015

Today marked a very important press conference for the ECB as they seek to convey greater detail of the upcoming quantitative easing program. European Central Bank President Mario Draghi announced that asset purchases will commence on March 9th and will continue through September of 2016 at a pace of €60 billion per month. Aside from detail on the “when” and “how much”, Draghi also gave markets upgraded growth estimates for the Euro Area for 2014. GDP in 2015 is expected to now grow at 1.50% annualized pace with 2016 forecast at 1.90% and 2017 at 2.10%. Inflation for 2015 is projected to be at 0.00%, just shy of deflation with 2016 expected to rebound to 1.50%. This is a very big gamble on inflationary expectations as it forecasts a solid bounce in energy prices in the next 12-18 months.

Irrespective of the overly optimistic projections from the ECB, these forecasts sharply contrast with private equity giant Blackstone’s assumptions which do not expect Europe to grow in its own predictions. Not to mention, today’s disappointing German factory data complicates the outlook further as it is expected to be a main source of growth for the Euro Area. The knee-jerk reaction in EURUSD was to the upside, gaining 50 pips within a very short period of time. However, the half-life of the move was mere minutes as the entire move was retraced to the downside, retesting and breaking the most recent lows. Prices dropped as low as 1.1006 before bouncing higher. The real question remains as to whether Mario Draghi will be able to buy enough bonds to make this asset purchase program an effective means to stimulate lending throughout the Euro Area.

 

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