Overnight, the euro pushed higher as traders positioned themselves ahead of tonight’s highly-anticipated central bank meetings.
All week there has been rumour and innuendo as to what level of detail Mario Draghi would reveal about the ECB’s expected bond purchase programme. Overnight, Bloomberg reported two central bank officials briefing on the programme, suggesting the ECB will undertake an unlimited and sterilised buying of sovereign debt with maturities of up to three years, but would refrain from setting yield caps. They also suggested the ECB will not have a seniority status on the bonds it buys and it could halt the programme if a member state fails to adhere to the pre-conditions.
Again, these announcements are not official and the market will want confirmation of these details from Mr Draghi himself, but the rumoured details were enough to see the euro rally above 1.26. The spreads on peripheral bonds were clear beneficiaries of the leaked details with Spanish 10-year yields contracting by 16 basis points. Should Mr Draghi fail to provide the market with an acceptable level of detail of the intended programme, there is the very real risk of a short-term pull back in the euro, particularly now, given it has rallied on the back of last night’s leaks. While the ECB will no doubt take centre stage tonight, we will also hear from Mervyn King and the BoE.
The BoE is likely to keep its policy rate and asset purchase target unchanged at 0.5% and £375 billion respectively. Last month, Governor King noted that further monetary stimulus is more likely to be in the form of additional QE rather than a rate cut, however, as we noted earlier in the week, August’s much better-than expected manufacturing PMI print may suggest the UK is slowly moving out of recessionary territory, therefore reducing the need and the likelihood of further policy intervention from the BoE. In early Asian trade the euro is essentially unchanged from its US closing level, trading at 1.2605.