After a mild sell-off yesterday, the euro is back to strengthening this morning. Earlier today, Bloomberg reported "according to officials familiar with the debate" that the ECB is to consider extending QE until at least September 2018. The news service also reported that reducing quantitative easing to 30 billion euros a month from the current pace of 60 billion euros is a possible option. Apparently, Council members have yet to officially discuss options - but these are the ideas currently up for debate. The reaction in the euro has been fairly limited so far. As we said yesterday: after falling into oversold territory earlier, the ongoing euro rally doesn't need many reasons to keep strengthening.
The EUR/USD exchange rate is now above 1.1830. Looking at EUR/JPY, the pair was down yesterday (and also this morning) and is currently just below 132.40. The euro is also trading down against the pound, with EUR/GBP now trading below 0.8980.
This is a fairly light week for the euro in terms of economic data releases. Draghi's speech yesterday contained few surprises: he praised negative interest rates while re-iterating that asset purchases would continue until the bank sees sustained inflation. He also stated that interest rates would stay at current levels "well past" quantitative easing. Reactions in the euro were fairly limited.
After rising sharply in the second week of October, we are now bullish on the euro. The common currency is gaining as Spain's Catalonia region did not unilaterally declare independence. There are also growing expectations that the ECB is set to taper its quantitative easing program following an upcoming meeting later this month. Looking at technicals, the currency has now re-entered normal trading conditions. Earlier, the currency was looking oversold. This is based on technical indicators on the daily chart of the euro currency index.
After rallying in the second week of October, our medium-term outlook on the euro is now neutral. The currency is appreciating as the ECB is expected to announce its decision to taper quantitative easing next year. Recently, Catalonia's president also avoided a unilateral declaration of independence, choosing instead to call for dialog while accepting the mandate of the referendum. We continue to believe that the euro is overbought, based on various technical indicators when looking at a weekly chart.