Date: 26 Oct 2017

A surprise on Thursday seems a very remote possibility.” That’s how Australia’s NAB is viewing today’s ECB policy meeting arguing that the ECB has “been flying so many policy kites” and has “aired so many speeches and prospective QE changes” in the run-up to the meeting that the eventual announcements “will likely result in only a modest market reaction.” Traders may hope that NAB is wrong and the ECB announcements do lend themselves to a greater degree of forex market volatility, but the Australian bank’s point is well-made. There has been a tremendous amount of discussion and analysis about what the ECB might announce today with the consensus, of which NAB is a part, expecting asset purchases to be cut to some 30 billion euros a month down from 60, with the timeframe for the purchase programme extended out to, perhaps, September 2018.

Additionally, markets are fully expecting the ECB to insist that its benchmark rates will remain unchanged and stay that way for an extended period of time. But if that briefly encapsulates what the currency market is expecting, it also allows traders to contemplate what the ECB could say, outside of those parameters, which could ignite the market.  A sub-30 billion euro figure for monthly assets, and/or a shorter mooted endpoint for the programme, would almost certainly lead traders to see the euro (EURUSD, EURGBP, EURJPY, EURCHF) higher but surely, given the euro’s existing level on a trade-weighted basis, that would be something the ECB would wish to avoid. Any hint that ECB benchmark rates might normalize in 2018 would likely also energize the euro, and so, for the same reason, not be something the ECB would like to encourage at this juncture.

But if those are the hawkish risks traders might wish to keep an ear open for, what of the dovish ones? NAB feels that “a statement line and/or Draghi press conference comments that press the point that the ECB really might carry on buying assets into 2018 (as opposed to a more ambiguous line) would be seen as more dovish than expected and inconsistent with the strength of current [euro zone] data.” In that case traders might see less value in the euro at present levels. Traders will all have their own strategies as the key central bank event of the week unfolds. Thinking about what the market is not expecting to hear rather than focusing just on what is expected might be one of those strategies.

Written by Neal Kimberley, External Currency Analyst.