Here's a piece from Goldman Sachs, via eFX, talking about EUR/USD, the ECB, and 'adaptive expectations'.
I usually just post these pieces without commentary, and I'm trying hard to do the same today.
I'd really love a rolly-eye emoticon though
In a note to clients, Goldman Sachs discusses its outlooks
and forecasts for EUR/USD arguing the the term 'adaptive expectations',
which describes how new information gets incorporated in the price
formation with a lag, can explain EUR/USD recent price action and
project its next direction.
Into last week's FOMC, GS notes that there was some dismay that
EUR/USD had not seen more follow-through since the ECB surprise. GS
thinks history helps put things in perspective.
"On September 4, 2014, the ECB surprised markets by
cutting the deposit rate and President Draghi used the press conference
to announce that the central bank's balance sheet would be "steered" to
early 2012 levels, essentially pre-announcing sovereign QE. Nonetheless,
EUR/$ fell only two big figures (from 1.3150 to 1.2950) on the day,
doing little more than price the deposit cut. It was only thanks to a
hawkish FOMC in December that EUR/$ finally broke below 1.25 in a
convincing manner, i.e., it took 3-4 months for EUR/$ to grind five big figures lower," GS notes.
Why this delay and what does it mean for today? GS thinks the
term "adaptive expectations" describes price formation in markets well,
in particular the idea that new information gets incorporated with a
lag.
"Much like the new information in September 2014, we think recent
signals from the ECB (revising inflation and growth forecasts lower in
September and putting December on markets' radar last week) are
deliberate and point to more stimulus," GS argues.
"After the painful period since March, it will take time
for markets to trust this message once again, i.e., "adaptive
expectations" will once again delay the adjustment in EUR/$, which we
see going to 1.05 ahead of the December 3 meeting," GS projects.
