A tantrum-free taper

Thought of the day

by Chief Investment Office 15 Jun 2018

European Central Bank (ECB) President Mario Draghi seems to have pulled off the difficult feat of announcing the end of quantitative easing (QE) without provoking a 2013-style taper tantrum. After the ECB decided to end its bond purchase program by the end of the year, Eurozone bond yields fell, stocks rallied and the euro suffered its biggest one-day decline since the Brexit vote in June 2016.

Looking at the details of the ECB decision and the earlier Federal Reserve rate hike, we think the short-term market reaction makes sense:

  • First, the ECB has not definitely committed to ending QE in December. The final decision remains data dependent. Second, it did commit to not hiking rates until at least next summer and so has lowered the potential for hawkish surprises early next year.
  • Draghi highlighted the risks to the economic outlook, such as rising protectionism, and cautioned that the recent soft patch in Eurozone data may last longer.
  • The Fed’s rate hike and updated economic forecasts this week recognized the strength of the US economy. Robust retail sales data on 14 June underlined the message and has weighed further on EURUSD sentiment.

Over the course of this year we expect Eurozone data to improve. Euro weakness in May and June will support European exports and slowly rising inflation. As the data improves, the euro is also likely to rise, but the risks have increased so it might take a bit longer and be more volatile than we have expected.

For more on this, read our recently published report ECB: Historic decision on QE.

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