According to Reuters, the chances of the ECB being able to engage full blown quantitative easing at all (let alone in the next few months) are highly unlikely. There are up to around 10 members of the governing council who are against further monetary easing (of a total of 24 members), whilst there are also concerns amongst some over Mario Draghi’s unauthorised monetary policy comments in recent press conferences. The comments that made public the ECB’s targeting of a €1 trillion balance sheet expansion have particularly irked some within the ECB. Mario Draghi could face some interesting questions today at the ECB press conference (13:30GMT).
The feeling is that unlike the Bank of Japan (which has just expanded its own programme of Quantitative & Qualitative Easing) which is in a position to easily loosen monetary policy as it is a single, unitary state, the make up of the Eurozone and subsequently the ECB voting structure means that it would be politically extremely dangerous to push though full blown QE with just a simple majority.
That makes today’s ECB press conference very interesting indeed. There will inevitably be questions from the media about whether the ECB was unanimous in its decisions and exactly how Draghi broaches this issue could be extremely telling of his position. If it is clear that members acre actively briefing against Draghi, what does this mean for his position as President? This is a story that is unlikely to be put to bed today.
If QE is highly unlikely then will this result in a relief rally on the euro? Already the euro is performing steadily today, with EUR/USD around 0.3% higher (as Cable is trading lower again). Technically, the euro remains under significant pressure and all things remaining equal, any rallies should be seen as a chance to buy. The uncertainty surrounding the ECB adds a different dimension though. If Mario Draghi suggests the ECB is unlikely to engage full blon QE in the coming months then there could be a relief rally on EUR/USD.
However, the strength of the US dollar is a key over-riding factor in the price of EUR/USD. This strength looks set to continue with the Dollar Index moving to within 1.5% of its key June 2010 high at 88.7. The volatility in EUR/USD could be elevated in the next day and a half, with Non-farm Payrolls due tomorrow and expected to be strong once again.
I would therefore still look to use any relief rally on the euro today as a chance to sell. There is still key resistance around $1.2600 which marks the beginning of an ideal selling zone, whilst the outlook would remain bearish whilst the key lower high at $1.2770 remains intact.