The ECB, corporate debt and EUR/USD

The speculation  that the ECB could buy corporate debt (sourced from Reuters) looks very positive for risk assets and very negative for the EUR.

Source: Bloomberg

If the ECB increases its balance sheet to 2012 levels (ie around E3 trillion, an extra E1 trillion from current levels), then we’ll need to see the range of instruments open to the ECB increase significantly. Corporate debt issuance by European residents is huge.

This should be seen as a potential stepping stone to buying government debt, which of course the Germans are opposed to and the market still sees as a 50:50 proposition.

Technically, the pair looks set to print a bearish outside day reversal, with the pair also selling off from the top Bollinger band. We also have a bear flag pattern in play, where EUR/USD needs to break the $1.2695 level to complete.

I like selling the pair here, but would do so in small sizes, adding on a close through the rising trend. I would place a stop loss at $1.2911, just above the October 15 high of $1.2887

I also like the fact US rate expectations have been pushed right back, with the market now expecting the Fed to lift the funds rate in November 2015, while the Fed funds future (December) is now at the lowest level this year.

A good run in US data with a rise in global inflation expectations should help EUR/USD lower as the market reprices Fed expectations. With this in mind, US CPI is in focus tonight, with the market expecting a ten basis point fall to 1.6%. A higher-than-forecast print could help the trade.

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