Last week the markets were focused on the ECB’s TLTRO auction that took place on Thursday. In December European banks took 129 billion of cheap loans. The figure is above the September reading of 83 billion, so the market reaction was mildly positive. However, this is far below the minimum level of 200 billion needed to help the ECB to expand its balance sheet by 1 trillion euros.
As a result, the long-term sentence to the euro has finally been pronounced: euro zone clearly needs a QE program to beat the dangerous deflationary pressure. This is a long-playing euro-bearish factor.
However, in the near term the bullish EUR/USD correction could extend further. Break above the 1.2500 mark would open the way to 1.2600 and then – to the 1.2900 resistance area. We expect the sharp decline with the targets far below the 1.2000 mark to resume from here.
The bullish EUR/USD scenario will be viable only if the US Fed maintains a neutral stance on the next week’s meeting. You should also note that the European banks will be paying back part of the LTRO loans next week. On the one hand, this is a sign of the banking sector’s health. On the other hand, the balance sheet reduction will only add pressure on the ECB to announce more stimulus in January.
As for the euro zone’s economic calendar, watch the December PMI and ZEW economic activity indices on Tuesday: forecasts are upbeat. On Thursday pay attention to the German Ifo Business Climate.