ECB likely to announce extension of QE by nine months in October

Given the recent ECB communication that indicates towards a preference for a ‘lower for longer’ scenario, the European Central Bank is expected to announce a QE extension by nine months at a rate of EUR 30 billion during 26 October, noted Danske Bank in a research report. Following that, the ECB is expected to end its QE purchases in the fourth quarter of 2018.

A larger scaling down of purchases would further ease QE implementation and higher reinvestment volumes of maturing bonds would also add to the monthly QE flows in 2018. The rate of appreciation of the effective euro has decelerated since September and is therefore less of a headache for the ECB now.

Inflation in the euro area is projected to remain below the central bank’s target rate in 2018. But the core inflation is expected to stay above 1 percent for the remainder of this year and the next year, which would be a significant argument in the ECB’s QE recalibration decision.

According to Danske Bank, the QE extension is expected to be implemented with continuing capital key deviations, while it is also likely that the central bank would purchase a higher share of corporate bonds, as these purchases would have a more direct economic effect and the ECB’s holdings are not close to the 7- percent ISIN limit.

Also, the ECB is unlikely to make any alterations to its forward guidance during the upcoming meeting. Moreover, the ECB is expected to keep the option to extend the QE horizon or scale up purchases again if the inflation outlook deteriorates. Markets currently expect the first hike only in mid-2019.

Meanwhile, any considerable reaction in EUR/USD is unlikely on the ECB’s QE recalibration announcement. According to Danske Bank, the EUR/USD pair is expected to be at around current levels on a one month to three-month horizon with the risks tilted slightly to the downside.

“Longer term, we continue to stress that a 2018 rebound towards 1.25 is on the cards, as upside risks still dominate the longer-term outlook”, added Danske Bank.

At 12:00 GMT the FxWirePro's Hourly Strength Index of Euro was neutral at 19.1092, while the FxWirePro's Hourly Strength Index of US Dollar was highly bullish at 152.552. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex

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