ECB set to announce QE tapering, Sterling soars after growth data

n July, President of the European Central Bank (ECB) Mario Draghi claimed that discussions on the future of its QE programme would take place ‘in the autumn’. With autumn upon us, investors are now gearing up for an announcement of both an extension and a reduction in monthly asset purchases to the ECB’s large scale asset purchasing measures. We think a six month extension will be the bare minimum, with risks skewed towards a longer extension of nine months following recent ‘lower for longer’ comments from chief economist Peter Praet.

As we have mentioned previously, we think the ECB will refrain from announcing an end date of its asset purchases and instead keep its options open to extend the programme further, should it be required. Beyond the expected extension, the real question will be by how much the ECB lowers its monthly asset purchases. Expectations range from a modest €5 billion cut to as much as €40 billion, with the median falling around the €20 billion a month level. We err on the lower end of these estimates given that core inflation has, as yet, shown no real signs of a sustained rebound.

Recent communications out of the ECB lead us to believe that Mario Draghi will disappoint the market by maintaining his cautious stance during his press conference at 13:30 UK time.

Bank of England edges towards hike after growth data

On Wednesday, Sterling jumped by over one percent against the US Dollar, making a fresh charge towards the 1.33 level after yesterday morning’s better-than-expected GDP data. The UK economy expanded 0.4% in the third quarter, a faster pace than the 0.3% estimate, and its fastest pace since the end of 2016. Both the services and manufacturing sectors expanded, while construction activity contracted again. The Bank of England will take heart from the fact that the UK economy appears to be weathering the effects of the ongoing Brexit negotiations. While growth remains at a still undesirably low level, we think that policymakers in the UK should have more than enough ammunition to warrant raising interest rates for the first time in a decade at its meeting next week.

With no major economic releases in the UK today the Pound is likely to be driven largely by developments out of the ECB meeting.

US new home sales jump by most in ten years

Yesterday’s impressive durable goods data provided no real encouragement to Dollar bulls, with the greenback ending London trading around half a percent lower. Sales for durable goods jumped by 2.2% in September after investors had eyed a 1% expansion. On an even more encouraging note, US new home sales unexpectedly spiked by its most since 2007, rocketing by a sky high 18.9% to 0.667 million units in September.

Absent any major surprises in today’s jobless claims data we expect the Dollar to trade mostly off the back of this afternoon’s European Central Bank meeting.