The ECB spin function is starting to gather speed. Here's why you should be careful
The members of the governing council are all imparting their views of yesterday's meeting onto us
Vitor Constancio's comment that he hopes the market corrects after it appreciates the measures is a key comment. It's a dovish comment and shows the worry that the lack of impact from the changes might reverse the market view of an easy ECB, and thus result in a rise in the euro
Many people are picking up on the details of QE extension. Our very own reader Si points out how much the extension will add to the balance sheet as a reason why the euro may fall back. The reinvesting of QE is a big move also
However, when talking about market management a central bank always walks a fine line. I've said it many times before, the fight comes when you try to remain dovish while acknowledging that your economy is improving. There was plenty of acknowledgement from the ECB yesterday and again today
Here's why the spin of what they have just announced might not mean the market should be swayed by it, and therefore manifest into further euro weakness
An extension out to 2017 is fine but it doesn't add single cent extra month to month from this day forward. It may signal that another €360bn can be put onto the balance sheet but there's no guarantees that we even get that far.
QE is supposed to help the economy recover and get inflation back to target. If the ECB have to wait until 2017, and the full allotment of QE to be placed then Europe really is in deep shit. If the economy continues to improve and inflation moves higher then the market will not be thinking about the amounts of QE coming through to 2017, they'll be thinking about tapering in 2016
The seeds have been sewn in the market now. There's still risks to the economy but the QE pumper has acknowledged that there are signs of improvement. They're willing to act but they don't feel the need to right now. That's enough of a seed for the market to change tack from thinking that the ECB are going to go from all guns blazing on further easing, to sitting on their hands. The 400+ pip move in the euro is all the proof you need
It's back to sitting between the rock and the hard place for the ECB and trying to keep dovish while the possibility of an improving economy spills out onto our data calendars
It may still be a bit early but the signs are there that the tide has changed for the market. It may not mean that the euro is on a one way trip to 1.20, as the dollar and the Fed are still a big part of the game, but as I said yesterday, and regularly about sentiment, this changes the dynamics of trading the euro from here on out and if you see that in evidence then you know how to trade it
