Week ahead: US FED prepares to End QE3 as ECB announce bond Purchases
- US FED to announce pace of QE3
- QE3 anticipated to cease to $0 (Bullish for US Dollar)
- US GDP coming up (Bearish projections)
- ECB to announce covered bond purchases for the previous week
- Trying to stimulate the Euro zone (Bearish for Euro)
ECB announces bond Purchases
Today the market is waiting for the ECB to announce the amount of the covered bind purchases it bought last week. This will help us price in the Euro and see the level of aggressiveness the ECB has started with. A high number of the bond purchases from the ECB is a bearish signal for the Euro as it will substantially increase the supply of Euros to the market and hence alter the supply demand differential.
However we look at it the covered bond purchase program pushes a bearish sentiment to the markets. Already the Euro has been selling off last week despite the encouraging PMI data form Germany. We closed 200 pips below the weeks high and over 50 pips blow the weeks open.
On 2 October when the ECB announced the asset purchase program, we saw speculators short the Euro 170 pips to the years low at 1.249. From those levels we have been able to retrace 300 pips up. We need strong bearish news for the Euro in order to break well below the 1.25 levels.
FED to end QE3
The US FED is preparing to announce the pace of QE3. From our assessment we found that following the positive growth figure the US economy has been showing we are very likely to see the QE program come to a stop this week. Last week, the inflation rate for the US flattened at 1.7% despite the dramatic fall oil prices we were anticipating a 0.1 reduction from the previous reading.
This flattening of the CPI represents strong underlying economic activity and an economic growth trajectory well on track. Sentiments from the FED have indicated that it intends to cease the QE3 program if it is of the opinion that the growth in the economy is not too fragile.
US GDP growth for Q3 to be announced
Also ahead for the USD, we should keep an eye out of the GDP figures for Q3 on Thursday. The figure announced will set the tone for how the USD will trade in this Q4. In Q2, the US posted a surprising 4.6% GDP growth which saw the US dollar rally across the board. The disappointing advance retail sales report for September at -0.3(negative 0.3) however put into question the ability of the economy to top that figure. Analysts are also concerned that should the growth rate continue beyond the 4.6 rate at the present time this could be a sign that the economy could over heat in the medium term. We also saw earlier last week that a strong USD is tapering the growth of the economy by making the US exports more expensive. Taking all this into consideration we are anticipating a lower than 4.6% GDP growth figure on Thursday.
Putting it all together
Last week’s showed that the resilience of the USD will persist despite the high valuation of the USD in recent times. We should keep in mind that the EURUSD is at a major psychological level and we have already tested it and failed to break below.
Should the news from the ECB be very bearish we could see a break below. It is however likely that speculator will sell the USD on Wednesday as the GDP figures are released. The best approach is to Short the EURUSD on Tuesday at major a major resistance. And to place sell orders for EURUSD about 30 pips below the 1.25 level.
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