Date: 26 Jul 2018

Following Wednesday’s apparent easing of trade tensions between the European Union and the United States, which helped push EURUSD higher, traders’ attention should shift to today’s European Central Bank (ECB) meeting. Judging from the general tone among bank analysts, it’s probably fair to say expectations for that are low. There’s a feeling that last month’s meeting essentially set the ECB’s monetary policy trajectory on auto-pilot with benchmark rates set to be on hold through summer 2019 and that today’s could be essentially a copy and paste exercise. Nevertheless its is likely that in the Q&A session journalists may try and get ECB President Mario Draghi to be a little more specific about when the ECB currently foresees a rate hike will be needed. If Draghi chooses to provide any greater clarity and if that includes any suggestion that a rate move might come before September 2019 (which is the earliest date analysts seem to expect it) then traders might logically see that as supportive for the euro (EURUSD, EURGBP, EURJPY).  On a separate note, there’s also the issue of the ECB’s reinvestment plans for its asset purchase programme (APP).  As traders will be aware, the ECB has set out how it intends to taper this APP off with present monthly purchases of 30 billion euros a month falling to 15 billion in October and an expectation the programme will end in December 2018. Reducing and then ending new purchases also means addressing reinvestment plans for existing holdings as they mature. Australia’s NAB made the point earlier in the week that “the weighted average maturity of the [ECB’s] APP portfolio is 7.6 years” so as the programme tapers off and then ends, then ahead of time “to maintain duration the ECB will need to reinvest in longer-dated bonds (likely > 10 years).” While the Australian bank acknowledges that the ECB’s “reinvestment policy will only be discussed, but is unlikely to be changed, at this meeting” there is an outside chance the ECB could announce something. NAB cautions that “a tweak to the [ECB’s] reinvestment policy to the extent it surprises markets could see the euro [yield] curve flatter which may at the margin weigh on [the euro].” So there are potential risks on either side that traders may wish to consider even if consensus expectations for the meeting are low.

by Neal Kimberley, External Currency Analyst.