Will the ECB bring QE to an end despite economic and political worries?

Eurozone monetary policy hits the headlines once again, with the ECB meeting due to put the spotlight on Draghi & co. With growth and inflation declining, will we see the ECB choose to bring their asset purchase scheme to an end?

ECB president Mario Draghi
Source: Bloomberg

Thursday’s European Central Bank (ECB) meeting sees its president Mario Draghi take centre stage once more, in a period that has been dominated by European instability. Italian fiscal revolt, riots in France, and a huge dose of chaos in the UK Brexit process should ensure the ECB take on a relatively risk-adverse stance when it comes to the crunch.

Whether or not the ECB can live up to the market expectations of an end to the asset purchase programme will be key in determining the fallout from this meeting. Slowing growth and falling inflation means there is less need to take the foot off the gas, yet the big question is whether we will see any shift away from the current pathway towards tighter monetary policy.

If market expectations are correct, we will likely see little to cause a huge amount of volatility, with this month’s asset purchases likely to be confirmed as the final in a multi-year policy of easing. Any shift from that stance is likely to come in a dovish direction, bringing a weaker euro. On the other side, we have the forward guidance element of things, with markets currently expecting to see interest rates rise remain at record lows through summer 2019.

Another element to keep an eye out for comes via the ECB staff projections, with both growth and inflation expected to be revised downwards thanks to weakening data and falling oil prices.

In terms of the euro, we are trading around a hugely significant area of support, with the 200-week simple moving average (SMA) and descending trendline both providing enough to keep the EUR/USD stable for now. A break through this support zone would provide us with a more bearish first quarter (Q1) of 2019 outlook, while a rebound from here would take shape in the event of a rally through the 20 November peak of $1.1472.

On the daily chart, that $1.1472 peak becomes more obvious, where a break through that level would bring a potential retracement of the sell-off from $1.1815 into question. Only with a break above that $1.1815 level would we be looking for a wider bullish phase to come into play.

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