ECB speculation counters EUR downside on political risks – MUFG

Derek Halpenny, European Head of GMR at MUFG, notes that reuters yesterday reported that the ECB next week will extend QE as expected but also in some way signal the eventual end of QE.

Key Quotes

“We don’t really see that as much of a surprise and given developments of late, the ECB must certainly be less fearful over market reaction to a signal of an end to QE. The potential of Trump reflation policies becoming reality along with this week’s surprise OPEC deal has certainly altered the balance of risks to inflation somewhat.”

“Furthermore, with the 10-year USGE yield spread at levels last seen in 1989, the ECB might see scope for signalling a shift in policy some time in H2 2017, perhaps conveniently around the time of the German federal elections. Too much policy divergence can create disorderly financial markets, so the ECB may see some benefit in not encouraging that momentum further.”