At the ECB’s September meeting tomorrow, the market is widely expecting the bank to keep current policy on hold in line with its earlier guidance that rates will remain at current levels “at least through summer of 2019”. However, the bank is expected to announce a reduction in asset purchases from 30 billion EUR per month to 15 billion EUR per month over the final quarter of 2018 with purchases to end completely starting in 2019.
Macro-Projections The Main Event
With the bank’s moves on rates and QE widely signaled, the main focus for the meeting will be on the ECB’s new macroeconomic projections which are expected to see the bank acknowledging downside risks to growth. Following the bank last updating its projections, downside risks have strengthened visibly regarding the Turkish currency crisis, Italian political uncertainty, and ongoing global trade concerns. With this in mind, the ECB is expected to revise down its GDP forecasts for 2018 and 2019 though the bank will likely highlight the fact that domestic demand remains firm with investment and consumption contributing positively to GDP despite weakness in exports.
Regarding inflation, the bank’s forecasts are likely to be roughly on par with those made in June given that the fall back in oil prices will be at least partly offset by the depreciation in EUR. Furthermore, reduced slack in the economy should support better wage growth meaning that the upward trend in inflation should continue, in line with the ECB’s view.
Q & A in Focus
Traders will be particularly keen to hear Mr. Draghi’s economic assessment and outlook in the Q&A following the meeting given the recent weakness we have seen in some key data readings. The risks around the eurozone are clearly troubling investors give the recent knock we have seen to confidence displayed in the latest data gathered by the European Commission over August:
- Business climate 1.22 (expected: 1.26, previous: 1.30)
- Economic confidence down for the 8th successive month at 111.6 (expected: 111.9, previous: 112.1)
- Industrial confidence 5.5 (expected: 5.5, previous: 5.8)
- Services confidence 14.7 (expected: 15.2, previous: 15.3)
- Consumer confidence (Final) -1.9 (expected: -1.9, previous: 1.9)
Addressing investor uncertainty will clearly be a priority for Draghi. However, If there is any suggestion, or if the market takes any interpretation, that QE might run longer than the year-end, this could fuel a sharp sell-off in EURUSD.
Alternatively, if Draghi retains an optimistic tone and outlook this will keep the market focus on the timing of reinvestments following the end of QE and the timing of the bank’s first rate hike.
Draghi has already stated that rates will remain on hold until summer 2019 (at least) which means that he will have two opportunities to raise rates at the September and October meetings before his term ends that year.
For now, it seems the market is happy to follow the ECB’s projections and is starting to rebuild long exposure as QE starts to wind down. Any deviation from this path though could quickly see the market flipping short again with plenty of room to drag EURUSD lower.
After a false break to the topside, EURUSD is back within the bearish channel that has framed price action over recent months, but the downside is underpinned by the band of support at the 1.1467 – 1.1507 region. While price holds above this level, another topside run looks likely with a break of 1.1731 needed to inspire bulls and attract momentum players.