Market Analysis

Previewing This Week’s ECB Meeting

Thursday’s European Central Bank (ECB) monetary policy meeting will be the key event for the euro (EURUSD, EURGBP, EURJPY). Japan’s Nomura Bank is “not expecting the ECB to announce any major changes to its policy parameters at the next Governing Council meeting on 20 July. We are, however, expecting the easing bias on the asset purchase programme (APP) to be dropped via the removal of the phrase concerning the Bank’s readiness to increase its size and/or duration from the forward guidance. That, in turn, should pave the way for a more formal announcement about the tapering of the APP at the following meeting on 7 September.” Traders may consider that last week’s announcement that ECB Chief Mario Draghi will attend the August 24-26 Federal Reserve symposium in Jackson Hole gives Draghi the perfect platform to send a policy message ahead of that September meeting. As for the here and now, Nomura sees “a risk of a slowdown in EUR appreciation. Even though [Nomura] expect the ECB  to change its forward guidance further, the change would not be a big positive surprise for the market. In contrast, no change in the forward guidance or negative comments on the recent market re-pricing from President Draghi could weaken EUR quickly.”

Germany’s Deutsche Bank doesn’t expect “any significant changes to the [ECB’s] language on rates or asset purchases” at this week’s meeting. The German firm expects “the ECB to maintain the current view on sequencing given the significant move in the euro exchange rate” while agreeing with Nomura that “on tapering… a decision will be taken at the September meeting.” Deutsche’s reference to the euro is arguably important. The ECB is walking something of a tightrope. It may not wish to precipitate a big sell-off in the euro, but nor will it want to set it running on the topside. France’s Credit Agricole CIB takes the view that the ECB might decide it has reasons to be cautious lest it triggers “further aggressive tightening of Eurozone financial conditions… via stronger EUR and higher rates, and [European Government Bond] yields.” The French bank argues that a further rise in the value of the euro “in conjunction with a still uncertain outlook for commodity prices should also pose downside risks to the Eurozone’s inflation outlook. In turn, slowing inflation could undermine the ECB credibility as it tries to normalise policy later in the year.”

Traders will need to bear in mind that while the euro will take its lead from what the ECB says on Thursday, what the ECB says will itself be partly based on where the euro already stands.

Written by Neal Kimberley, External Currency Analyst.