The market is widely expecting the European Central Bank (ECB) to announce a program of Quantitative Easing (QE) this Thursday during their Press Conference scheduled to begin at 1:30pm London time. The announcement of such a program could normally be expected to cause the value of the Euro to fall against other currencies. However, there is plenty of debate as to how the market will react, and if there is a program, how large it will be.
The Market Consensus on Euro QE
The market is expecting that the President of the ECB Mario Draghi will announce a program of purchasing approximately $640 billion worth of bonds, with detailed timetabling and mechanisms as part of the announcement, in order to stave off deflationary pressures that are weighing heavily on the Eurozone’s economy. If the announcement were less than $500 billion, it would certainly be a surprise. Expectation has been further heightened by the Swiss National Bank’s move to uncouple the Swiss Franc from its peg against the Euro last week, due to speculation that the SNB felt they could not afford to maintain the peg once a program of QE for the Euro became a confirmed reality. The Euro closed last week at a low it had not seen for 11 years, and is actually worth less now that it was when it was launched more than a decade ago, indicating that speculators are in the mood to see a further decline as likely.
How Euro QE will Affect the Market
In the highly unlikely event that no program is announced, or is announced but with an indefinite delay on implementation, it is probable that the Euro would rise immediately and dramatically, perhaps by 2% to 3%, with volatility washing across all the major global markets.
If a program is announced that roughly accords to the market’s general expectations, it is quite probable the Euro will fall, but the market may well have “priced in” such a move.
The devil is probably going to lie in the details: how large and how fast the program will be is going to be the focus. The smaller and slower compared to expectations, the less of a fall (or more of a rise) there is likely to be.
If the Euro falls, it will probably do so most strongly related to Gold and the USD, and quite possibly also in CHF terms.
If the Euro rises, its likeliest weakest partner is less clear at the moment.
Program Details
If, as expected, a program is announced, the key detailed questions that the market will be waiting to hear are:
Will there be a total purchase size announced for the program, or an open-ended month amount?
Will the ending of the program be tied to a specific and quantifiable goal or goals?
Will the instruments to be purchased be limited to sovereign bonds, or include other debt instruments?
How will the purchases be divided up between the members of the Eurozone? A “capital key” basis is expected.
We will all be getting some answers this Thursday.