QE and Inflation – A finely balanced ECB press conference

The European Central Bank will be convening today for its monthly monetary policy setting meeting and going by last month’s press conference, it is quite likely that today’s event will see no major shifts from the Central Bank as far as policy changes are concerned. Instead, the ECB President, Mario Draghi is more likely to convey to the markets the effects of the Central Bank’s QE so far as well as acknowledge the recent pickup in inflation in the Eurozone.

We expect today’s ECB conference to be very neutral and perhaps see a balanced and cautious approach from the ECB President who is rather likely to stress on the fact that the Central Bank would continue to keep up with its QE purchases and put to rest any whispers of a premature exit. On the same note, the ECB could also acknowledge the recent pickup in economic activity in the Eurozone.

The most recent economic data from the Eurozone included the inflation numbers, which increased 0.3% y/y in the month of May after a lackluster print in April. The increase in inflation also managed to beat the street consensus of 0.2%. On an annualized basis, consumer price inflation rose 0.9% on the core, up from 0.7% in April, reflecting the general view that the deflationary threats to the Eurozone seem to be subsiding quickly.

Credit lending, which was a major issue for most of last year has also started to show signs of activity. M3 money supply managed to accelerate to 5.3% from 4.9% previously in March, marking one of the strongest pickup since 2008 and the fact that the credit cycle was slowly starting to move.

The ECB could also go into details about its QE front-loading purchases announced few weeks ago in order to balance out the liquidity issues during the summer months.

Greece is also likely to come up during the Q&A sessions, but so far it seems like the Eurozone leaders have been trying hard to get a deal put in place for Greece which should at the very least quell any doubts for the near term.

The Single Currency has managed to remain strong in the past month after the US Dollar saw a short term weakness set in as the EURUSD is starting to look more convincing of forming a bottom near 1.082 after previously hitting multiyear lows near 1.05. Most recent inflation data from the US hasn’t been that uplifting for the Greenback as the Core PCE continued to remain below the Fed’s target rate a contrast to the Euro. As far as speculative positioning is concerned, the Euro is starting to look a lot stronger fundamentally than the Greenback and is perhaps one of the fundamental reasons for the recent surge in the Euro against the US Dollar.

From a technical perspective, EURUSD is currently trading near the 1.10 technical level which could prove to be decisive today. If support is established near 1.10, EURUSD could well be on its way to test the previous highs near the 1.14 technical level and perhaps even aim higher. While on the other hand any unforeseen risks (especially from Greece) could see the EURUSD fail to hold above 1.10 which could push the currency back to the previous lows.

Besides the ECB’s monetary policy statement today, the US ADP private payrolls data is due around the same time. Expectations are for a modest increase of 198k, from 169k previously.