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Forex Circles 2014-11-06 18:45:34

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The European Central Bank and the Bank of England left their interest rate policies unchanged, in line with market expectations. The ECB did move closer toward what would be considered a full blown quantitative easing program, as ECB President Mario Draghi tasking ECB staff and committees with the preparation of additional measures. At the same time, Draghi tried to calm reports of a rift at the council, by officially announcing the aim to expand the balance sheet by around EUR 1 trillion.

Draghi said in his press conference that the central bank responded to the outlook for low inflation, weakening growth and continued subdued monetary dynamics. Draghi also said that the measures will have a sizeable impact on the central bank’s balance sheet, which is expected to move towards the dimensions it had at the beginning of 2012.

A confirmation of a balance sheet target of Euro 1 trillion, which Draghi already mentioned in a statement to the European parliament back in September, now seems to have been endorsed by the council. An expansion of the central bank’s balance sheet of this size seems difficult as long as the ECB concentrates just on covered bonds and ABS in its asset purchase program, which has kept speculation of a widening of the scope of purchases alive in recent month.

Draghi did qualify the volumes involved somewhat by stressing on the one hand that the purchase program will run at least over two years and that volumes are expected to increase over that time. He also stressed that an expansion of the balance sheet by EUR 1 trillion doesn’t mean the ECB has to purchase papers worth EUR 1 trillion.

Following his statement the Euro moved lower testing levels not seen since 2012.  Momentum is negative with the MACD (moving average convergence divergence) index printing in negative territory with a downward sloping trajectory.  The only caveat is that the RSI (relative strength index) is printing a reading of 23, which is below the oversold trigger level of 30 and could foreshadow a correction.


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