The upcoming October meeting, due tomorrow, is not expected to see any policy adjustments by the bank after it announced a reduction in monthly asset purchases in September and clarified its intention to end purchases entirely by year end.
Data Not Encouraging
Incoming data since the last meeting has either met expectations or surprised to the downside, painting a mixed picture within the eurozone, headlined by the unexpected weakness in core inflation which printed 0.9% in September. However, wage growth has been rising in the Eurozone which will encourage the ECB. Indeed, recent commentary from the ECB regarding wage growth and inflation has been decidedly hawkish. At the last meeting, Draghi referred to the “relatively vigorous pick-up in underlying inflation.” However, it will be interesting to note the bank’s latest assessment given the recent weakness.
September Minutes Highlight Concerns
Furthermore, the release of the September meeting showed that some members of the governing council felt that despite the pick-up in wage growth, transmission of higher wages into consumer price inflation remained unclear and subject to time lags in any case. The minutes also revealed concern about downside risks from increased labor market productivity.
External Factors Still Weigh
Alongside the mixed domestic data environment, political elements (both internal and external) are still clouding the outlook as both the Italian budget saga and Brexit negotiations trundle on under the shadow of the downtick in global trade linked to the US /China trade war. The ECB acknowledged the threat from these factors last time around, also noting financial market volatility and emerging market distress. With thee factors just as prominent now, we can expect the ECB to once again outline the risks facing the eurozone.
Regarding the situation with Italy, we are unlikely to hear Draghi deliver any detail on the subject while, with the risks of a no deal Brexit having grown substantially since last time around, we might hear a little more when it comes to Brexit.
The key focus will be on the ECB’s comments regarding the future of the APP. To this end, we are likely to see the bank retain the word “anticipate” in its statement, affording the bank some ambiguity. However, if we see the removal of this word, pointing to a definite end to the APP this year, we could see quite a sharp move higher.
Positioning in EUR has been volatile over recent months. After building to record high long exposure over the first part of the year, positioning has since fallen off a cliff and investors are now net short EUR once again, with downside momentum growing. Much of this is premised on the ECB having constantly reaffirmed that rates will stay low until at last summer 2019. However, if we see the end QE in December as expected, EUR should become much more sensitive to positive data which will lift expectations of earlier than expected tightening.
After rallying up to 1.25 at the start of the year, EURUSD has since fallen by over 1000 pips. The current technical formation suggests that the move might still be corrective to the rally over the last two years and that further upside could be in store. The falling wedge pattern which has framed price action over the last year has now met strong structural support, putting the market on watch for a topside break. The first test of the 1.3048 level support saw strong demand kick in, though price has since fallen lower again. While price is above here, focus is on an eventual break higher, but if price breaks below here, the bottom of the falling wedge will be the last chance for bulls before we see a steeper decline resume.