Image via European Central Bank
ECB On The Wires
Ahead of the keenly anticipated December ECB meeting, comments from officials have started hitting the wires. Market expectations have already been ignited at the October meeting where ECB chief Draghi noted that the next major decisions regarding the path of the bank’s QE programme would be unveiled at the December meeting. The ECB have been assessing options for increasing the availability of assets whilst the meeting will also provide updated staff macro forecasts. Market expectations at this stage are tilted in favour of the bank announcing an extension of the QE programme beyond the current March 2017 end date. With seemingly more Dovish members than Hawkish, the committee looks likely to achieve in pushing through an extension in line with the subdued outlook for core inflation supporting their argument.
From The Doves
Whilst there does seem to be more Doves than Hawks in the ECB camp it is important to consider both viewpoints with some members having made Hawkish comments recently. Bundesbank President Weidmann spoke in Frankfurt on Friday saying that “most of the reasons for the current low rate of inflation are only temporary in nature! And also noted that “the impact of the strong decline in oil prices is already beginning to be washed out of the inflation rate” and that “what went down will go up”. Following these comments on Monday, the Bundesbank also spoke with optimism regarding the outlook for the German economy saying that the underlying cyclical momentum was “quite strong”.
Furthermore, EuroZone monetary indicators were not demonstrating the need for further action at this stage. Alongside these comments, we also had Executive Board member Yves Mersch noting that the ECB’s unconventional policies should be viewed as “temporary” and that they “should, therefore, be withdrawn again as soon as possible”. However, Mr Mersch also countered these comments with the caveat that “growth is still sluggish and the path of inflation is not self-sustaining, particularly with a view to self-sustaining particularly with a view to domestic price pressures”.
From The Hawks
From the Dovish camp, comments have been equally instructive. ECB chief Draghi spoke at the European Parliament on Monday calling for “decisive support” from other economic policymakers, stressing the need for structural reform while also noting that fiscal policies “should also support the economic recovery while remaining in compliance with the fiscal rules of the European Union”. However, Draghi also noted that an extension of the bank’s QE programme would be necessary given that “the return of inflation toward our objective still relies on the continuation of the current, unprecedented levels of monetary support in spite of the gradual closing of the output gap”.
We also heard from the ECB’s chief economist Peter Praet, one of the more dovish ECB members, who noted that “material downside risks remain” to the economic outlook. Praet also noted that the ECB remained “fully committed to preserving the very substantial amount of monetary accommodation which is necessary to secure a sustained convergence of inflation towards our inflation aim”.
Clearly there is still some division among the ECB, however, markets are clearly anticipating a Dovish catalyst at the upcoming meeting. EURUSD has fallen more than 700 pips from the high of the US election day in a move not solely driven by the divergence between EuroZone and US monetary policy. The upcoming European political agenda is increasing uncertainty in the light of recent political events, and bearish pressure is growing. December will perhaps provide the chance of r the ECB to once again reassure investors that they stand ready to backstop the European economy.
EURGBP is currently challenging the 38.2% fib retracement from the last significant swing low in the 18-month bull trend. Key technical support for the pair comes in at a retest of the pre-Brexit high in line with rising trend line support from near year to date lows.