Euro at Risk of Profit-Taking as End of Asset-Purchase Program Nears

EUR analysis and talking points:

The European Central Bank Governing Council will likely discuss ending its asset-purchase program when it meets next Thursday.

However, that may already be priced in to Euro exchange rates, leaving it vulnerable to profit-taking after its recent advances.

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ECB set to discuss ending bond buying

The European Central Bank’s Governing Council now seems certain to discuss ending its asset-purchase program when the committee that sets monetary policy for the Eurozone meets next Thursday. However, that does not mean that the Euro’s recent rally will necessarily continue.

Speaking yesterday, ECB Chief Economist Peter Praet said that “next week the Governing Council will have to assess whether progress so far has been sufficient to warrant a gradual unwinding of the ECB’s net asset purchases”.

This was echoed by other ECB officials. Bundesbank President Jens Weidmann said that “for some time now, financial market participants have been expecting that asset purchases will end before 2018 is out.” He added: that “as things stand, I find these market expectations plausible”, noting that this would be the first step towards normalizing monetary policy for the region.

Dutch central bank President Klaas Knot said it makes sense to herald the end of the bond-buying program quickly, while Estonia’s Ardo Hansson said higher Eurozone interest rates are possible before the middle of next year.

Such comments have helped EURUSD to rally after its steep losses in late April and May.

EURUSD Price Chart, Daily Timeframe (Year to Date)

Chart by IG

Bund yields have also risen, with the 10-year benchmark yield now back above 0.5% as Eurozone inflation has climbed to 1.9%, in line with the ECB’s target of below but close to 2%. However, an end to bond buying is now so widely expected that the Euro could soften on a “buy the rumor, sell the fact” trade, particularly if the US Dollar is lifted by safe-haven buying on a row over US trade at the G7 Summit that begins tomorrow.

Moreover, an actual Eurozone rate increase is still not expected any time soon, with the probability of a rise by next April still less than 50% according to market pricing.

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— Written by Martin Essex, Analyst and Editor

Feel free to contact me via the comments section below, via email at martin.essex@ig.com or on Twitter @MartinSEssex

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