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ECB Throws a One-Two Punch

Daily Analysis - 11/12/2016

Euro Falls on Combination of Asset Purchase Program Extension and Tapering

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After weathering the Italian referendum, European market participants were surprised by the latest measures enacted by the European Central Bank which include an extension of the asset purchase program through December and the tapering of purchases in April.  The Euro fell after the announcement, while the US dollar ended the week higher as the Federal Reserve decision approaches.

Last Week


Volatility experienced a notable pickup this last week, especially in the foreign exchange market after the Italian referendum votes were tallied.  Although Italian’s voted against the move to consolidate the government and add stability, the initial kneejerk reaction lower in the Euro and financial markets, quickly reversed. The real fireworks came during the European Central Bank monetary policy decision on Thursday which saw ECB President Mario Draghi and the Governing Council announce an extension of the ongoing asset purchase program.  Besides extending the program past the March expiration, in April, purchases are set to taper from the current €80 billion per month to €60 billion.  Other major central banks left their respective benchmark interest rates unchanged with the Bank of Canada keeping rates steady at 0.50% while the Reserve Bank of Australia held firm at 1.50%.  However, Australia experienced a major setback during the third quarter, with GDP contracting for the first time in over 5 years. In a sign that conditions are gradually improving in China, both consumer prices and producer prices trended higher in November.  Adding to the optimism was exports and imports that climbed back into positive territory on an annualized basis through the 12-months ended in November.

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The Week Ahead


The coming sessions will be dominated by key decisions from major central banks alongside inflation data from across the globe.  Markets will be predominantly focused on the Federal Reserve and the Wednesday FOMC decision on interest rates alongside indications of the path for continued policy normalization.  The Federal Reserve is widely forecast to lift rates from 0.50% to 0.75% during the meeting, with investors expected to carefully review the statement for any hints of the timeline for future hikes.  Aside from the Federal Reserve, the Bank of England Monetary Policy Committee is also set to hand down its own decision during the week.  Forecasts are not anticipating any changes in the interest rate environment or the amount of quantitative easing currently being conducted.  Besides the interest rate decisions are multiple announcements relating to consumer prices with Germany, Spain, and the UK leading off with CPI data on Tuesday.  Later in the week, the US will be released comparable data relating to consumer prices, with expectations for modest growth while the Euro Area will report CPI inflation on Friday.  Other important figures set to be released throughout the week include figures pertaining to US and UK retail sales and manufacturing purchasing managers’ indices from across Europe.

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