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Euro Area Outlook for 2015: Impact of Broad-Based QE

The expected ECB QE programme will support economic activity through a number of channels and hence it strengthens our view of a stronger recovery.

A very important part of a large scale QE programme would be the signal that the ECB is committed to its mandate as this supports inflation expectations.

Government bond markets will be affected by the direct purchase effect and the 'hot potato effect', which drives investors out on the curve and into riskier assets. Around 28% of the EGB market is currently yielding negative.

We expect the ECB QE will drive peripheral spreads tighter vs. Germany and Portugal is set to be the biggest beneficiary.

The direction in Bunds and EUR swaps is more uncertain and will depend on the inflation and growth development.

The already strong demand for Bunds should strengthen when the ECB starts buying. However, we do not see a case for a strong push down in the Bund yield.

We expect EUR/USD to go further down for now as the ECB is set to expand its balance sheet aggressively, and as a Fed hiking cycle is to be initiated in June.

During H2 we see potential for EUR/USD to rebound provided markets factor in an improving euro outlook and a Fed that will tighten policy only very slowly.

When the ECB implements large scale asset purchases it is our base case that it will have a positive effect for euro area equity markets.

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