QE discussed – EUR/USD initially jumps, then slides

It’s ECB day and the stakes were high. After the rates were left unchanged, all eyes were on the Draghi drama. The ECB will assess the recent fall in oil prices and decide in Q1 2015. This sent the euro higher. However, the sharp downgrade in forecasts left it below resistance at 1.2360. Update: EUR/USD continues advancing. Another update: QE is discussed in depth and Draghi is supportive. EUR/USD slides back down but ends the presser above the previous levels.

Follow us for a live blog of the all-important event:

Analysis: 5 reasons why it could be a sell opportunity

Highlights

• ECB will re-assess stimulus in early 2015 and not necessarily in the next meeting.
• ECB staff is working hard.
• Nothing imminent -EUR/USD initially higher
• GDP revised to the downside
• Inflation revised down and does not include the recent fall in oil prices.
• Danger of oil reaching long term inflation.
• Decision wasn’t unanimous
• QE was discussed
• Draghi emphasizes advantages of QE.
• Discussed everything but gold.

Live Blog

• 13:15 GMT Press conference begins at 13:30. All times are GMT.
• 13:15 The US releases its jobless claims at the same, and they are predicted to fall under 300K.
• 13:15 You can see the event live here.
• 13:15 This is the first time the ECB meets in its new building in Frankfurt.
• 13:16 The new building is featured in the new film that you see before the event begins.
• 13:18 The stakes are high with many factors converging.
• 13:20 At current levels, resistance appears at 1.2360 and support at 1.2250.
• 13:21 We are at the lowest levels since 2012, less than 300 pips from Draghi’s “whatever it takes” moment.
• 13:23 The ECB previously forecast an inflation rate of 0.6% in 2014, 1.1% in 2015 and 1.4% in 2016. The 2014 numbers have undergone revisions as you can see here.
• 13:24 Growth forecasts have also been trimmed down and currently stand at 0.9% for 2014, 1.6% for 2015 and 1.9% for 2016.
• 13:24 The aforementioned forecasts were put out in September and now we get new ones.
• 13:25 EUR/USD is ticking up to 1.2312, but ranges are very limited in anticipation of Draghi.
• 13:28 We already have live pictures from Frankfurt. Draghi is about to enter.
• 13:30 US jobless claims drop to 297K as expected.
• 13:31 Draghi is still awaited.
• 13:32 EUR/USD is getting nervous and rising above 1.320 as Draghi is awaited.
• 13:33 Maybe he is lost in the new building.
• 13:34 Draghi arrived – presser begins – EUR/USD
• 13:34 He begins by talking about the new building…
• 13:35 Statement: In line with our forward guidance, rates are unchanged. We have started purchasing bonds and ABS.
• 13:36 Next week, we will have the second TLTRO. Intended to move towards the dimensions of 2012.
• 13:37 Our measures to ease more. EUR/USD dips
• 13:37 We see lower inflation and weaker GDP growth.
• 13:37 Early next year, the GC will reassess the balance sheet, outlook for price development and recent oil developments.
• 13:38 Should it become necessary, we remain unanimous to use additional unconventional measures.
• 13:38 ECB staff have stepped up the preparations for further measures to be implemented in a timely manner. 
• 13:39 Nothing imminent in the statement, EUR/USD leaps to 1.2355, still below resistance at 1.2360.
• 13:39 Weaker growth profile but domestic demand should be supported by monetary measures.
• 13:40 Energy prices support additional income.
• 13:40 Eurosystem staff macroeconomic projections: Annual real GDP increasing by 0.8% in 2014, 1.0% in 2015 and 1.5% in 2016
• 13:40 Projections for GDP growth have been downgraded.
• 13:41 HICP stands at 0.3% (as we already know).
• 13:42 a fall in energy prices.
• 13:42 It will be important to assess the recent changes and their affect on long term inflation and spillover effects.
• 13:43 Inflation expectations: 0.7% in 2015 and 1.3% in 2016.
• 13:44 They do not include the recent sharp fall in oil prices.
• 13:45 Prepared to provide further stimulus if necessary.
• 13:46 We are supporting economic activity.
• 13:47 Governments must do their role…
• 13:48 Questions begin
• 13:49 Draghi refuses what “early in 2015” exactly means.
• 13:50 Draghi explains the impact of oil prices and mentions the danger of them becoming “embedded” in other prices.
• 13:51 EUR/USD is testing the highs again.
• 13:52 Lower oil prices could impact core inflation as well. It is important that it doesn’t get into second round effects.
• 13:53 Vast majority but no unanimous decision.
• 13:53 Balance sheet target is an intention, not target.
• 13:54 The ECB supports the Juncker plan. It is the only plan that is out there.
• 13:55 EUR/USD struggling with the previous double bottom of 1.2360.
• 13:56 Net takeup is important to watch. Initial TLTRO was picked up intthe low end of our expectations.
• 13:58 EUR/USD breaks above 1.24.
• 13:59 QE was discussed. 
• 14:00 EUR/USD slides from 1.24 on the mention of QE.
• 14:01 Draghi explains the debate if the fall in oil is helpful or could impact long term inflation.
• 14:02 It seems there was a big battle within the Governing Council.
• 14:03 There was a “rich, ample discussion”.
• 14:04 Questions continue and EUR/USD slides down from 1.24.
• 14:05 We did a lot in June and September and we need time to assess this.
• 14:06 However, the outlook has changed since then.
• 14:07 Constancio says they have not taken any decision.
• 14:09 Q: Would you need a bigger majority for QE?
• 14:10 The final decision about structural reform for France and Italy is at the hands of the commission.
• 14:11 WE don’t need unanimity on QE
• 14:12 This means that German consent is not necessary. EUR/USD is ticking marginally lower.
• 14:13 QE has been effective in the US and the UK
• 14:14 QE shows a big commitment. There is a well documented relationship between the size of the balance sheet and inflation expectations.
• 14:15 Thinking deeply about that.
• 14:16 ECB committed to complying with its mandate.
• 14:16 Discussed all assets but gold.
• 14:17 EUR/USD slides on QE talk. Below 1.2360 which is shattered. 
• 14:18 Draghi continues QE talk and mentions some advantages.
• 14:19 There will be effects from current measures as well.
• 14:20 Against FX intervention.
• 14:21 In the meantime, USD/JPY breaks 120.
• 14:22 Interest rates at lower bound, so balance sheet tool is used.
• 14:23 We discussed the option of QE, which means buying bonds and more.
• 14:24 The discussion continues along the decisions in June and September.
• 14:25 EUR/USD getting comfortable at 1.2360 – 1.24 range.
• 14:26 On QE unanimity, Draghi reminds us about the ECB mandate.
• 14:27 Let’s first design the QE, and then we’ll answer these questions.
• 14:28 Exchange rate has weakened and this is positive, but global growth is softer.
• 14:29 The market will expand also on our action
• 14:30 We are careful not to crowd out private investors.
• 14:31 Draghi rules out discussions about illegal measures.
• 14:32 We are convinced that a QE program that could include sovereign bonds, is within the mandate. Not to pursue our mandate would be illegal.
• 14:33 Press conference ends. EUR/USD is one leg lower.

Background

Euro-zone inflation fell to the lows of 0.3% and not for the first time. And it’s not only energy prices as core inflation is at 0.7%. This is far from the ECB’s mandate. President Draghi had a sense of urgency about the situation and VP Constancio talked about QE in more details. We have new quarterly forecasts, and they will likely be worse. The next meeting is only on January 22nd. All this leads to QE. However, we have another tranche of the TLTRO next week and fierce German opposition.

Here is the full preview: A big step towards QE? 3 scenarios

And, Goldman Sachs says that QE is far from being priced into EUR/USD

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