Forex - EUR/USD Flows: EUR/USD weaker as ECB unveils a small bazooka, but downside unlikely to be large

 12:14 (GMT) 12 Sep

  [Forex Flows]   [Central Banks]

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The ECB decision has produced everything that the market hoped for, but in small size. So it is not quite the "big bazooka" that the doves were advocating, but it delivers more than the hawks would have wanted. The cut in the deposit facility was 10bp rather than the 20 some hoped for. The renewed QE is EUR20bn per month, below the 30bn some were suggesting, and the TLTRO3 rate was cut to the MRO rather than below it as the doves were advocating. Tiering is promised, and that has helped bank stocks to rally, though we have to wait until the press conference for the details.

EUR/USD Flows: EUR/USD weaker as ECB unveils a small bazooka, but downside unlikely to be large (0101-PFGH-C01)

The EUR has dropped around 50 pips on the news, with 10 year bund yields down 6bps, though peripherals have fallen more. The knee jerk reaction is consistent with the view that the announcement is slightly more aggressive than was expected, by including many separate measures. But we wouldn't see this as a strong reason for new EUR shorts. If there is any market belief that the measures will be successful in raising inflation and nominal growth expectations, declines in yields are unlikely to extend and may well reverse. The decline in peripheral yields can be seen as an indication of a decline in the risk premium attached to Eurozone assets, while the recovery in bank stocks is also positive for sentiment. While the decline in yields increases the spread advantage of the USD, the change is modest and spreads have not been a strong guide to the EUR this year. We would expect Draghi to try and sell positive Eurozone prospects at the press conference, and that may trigger a bounce. Still, initial momentum is negative. 1.0950 should provide initial support, and if we don't get a bounce at the press conference expect a break to new lows below 1.0925 targeting the retracement level of 1.0860.

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