The euro has stabilized after extending yesterday’s ECB-driven losses. The euro’s drop yesterday was the largest since the UK referendum to leave the EU. Ahead of the weekend, there may be some room for additional corrective upticks, but they will likely be limited, with the $1.0650 area offering initial resistance.In the larger picture, this week’s range, roughly $1.05 to $1.0850 likely will confine the price action for the remainder of the month, though of course, thin holiday markets (after FOMC next week) could make for erratic price action. 

The German two-year yield is a few basis points from the record low seen in late November. The US premium is at the high for the week and less than two basis points below the extreme in 16 years. Next week, the FOMC meets, and while a rate hike has been discounted, growth and inflation forecasts may be lifted. The recent Wall Street Journal survey of economists found the majority expected three hikes next year. 

Investors continued to digest the ECB’s announcements yesterday. Following the Federal Reserve, tapering is meant to imply a slowing of purchases toward an ending of them. What the ECB announced yesterday was most definitely not that.In fact, the asset purchases seem to be quite open-ended.Consider that the staff forecast of 1.7% for 2019 inflation was rejected by Draghi is insufficient to discharge the ECB’s duty.  Draghi repeatedly and vociferously denied the ECB was tapering.  

The reduction of the monthly purchases could reflect at least two forces. First, it could have been a small price to get some of the creditors, like Germany, to go along.  This is desirable even if not necessary.It does not give up much.In fact, the ECB will buy 540 bln euro of bonds instead of the 480 bln the market had expected (9*60>6*80).By the end of next year, the ECB’s balance sheet will be about 40% of GDP.Second, by reducing the amount, the ECB could help alleviate some shortage pressure.