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The Euro and Thursday's ECB Meeting: Here's What the Analysts are Saying

EUR/USD is above 1.24 and the ECB might want to try and talk it down at this week's meeting. Analysts give their views below on what to expect Thursday.

The Euro could see volatile trading heading into Thursday when the European Central Bank will announce its latest monetary policy decisions and Mario Draghi will address audience questions at a press conference afterward.

Economists a unanimous in forecasting the ECB will leave all of the elements of its current monetary policy program unchanged, so January’s macroeconomic forecasts will be the main focus for markets.

Traders, and the media, will also be watching closely for changes to the ECB’s so called forward guidance on future monetary policy for signs of a change in mindset among rate setters.

The latest ECB meeting minutes showed policymakers discussing the need to begin adapting their forward guidance during the months ahead, to the new reality of European monetary policy.

After all, the ECB has reduced the amount of Eurozone bonds it buys every month under its quantitative easing program, from €60 billion to €30 billion, this month and is expected to close the program completely by September.

The next step after this point will be an interest rate rise although policymakers have stuck to the same script on this point for three years already. 

Markets were excited by the prospect of the ECB beginning to consider life beyond quantitative easing although opinions are divided over when this change might come and low inflation may yet slow the pace of normalisation.

Analysts are giving their views below on what path the ECB might take this Thursday and what that could mean for the Euro, which has risen by more than 2% against the Dollar already in 2018.

The common currency has now gained 15% over a 12 month horizon and a lower, but still double digit, number on a trade weighted basis.

Above: EUR/USD shown at weekly intervals.

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Analyst Views:

 

Viraj Patel, strategist, ING Group 

"The burning question for FX markets at today’s ECB meeting is “Will – and can – President Draghi talk the euro lower?”

"For the past week, we’ve argued that in the current environment – there is very little the ECB can do to stem the tide of a stronger EUR."

"In a backdrop of broad $ weakness against all major currencies...there may be little macro-related impetus for the ECB to actively talk the euro lower."

"Still, markets may see Draghi’s mission today – should he wish to accept it – as keeping a lid on EUR/USD below 1.25."

"In the coming months, we believe this will prove to be a mission that is ultimately impossible."

"We look for any post-ECB knee-jerk move lower in EUR/USD to be fairly shallow – with the 1.2300/50 area providing support. EUR/GBP vulnerable to break below 0.87."

 

Guy Stear, head of fixed income strategy, Societe Generale 

"The account from the December meeting revealed a very positive economic outlook and a widely shared view on the need to evolve communication gradually already early in the year."

"Draghi will need to clarify whether it reflects more hawkish views overall or simply a wish to allow greater flexibility in relation to incoming data."

"We expect Draghi to strike a dovish tone while clarifying communication from the last meeting. He is likely to receive questions on the impact of the stronger Euro as well." 

"The Euro has been a major beneficiary of the Dollar's fall and the trade-weighted is back at the level preceding the ECB QE announcement in January 2015. The market will be listening intently to Draghi's comments about the ECB policy and the exchange rate today."

 

Jacqui Douglas, chief European macro strategist, TD Securities

"We think EURUSD may be vulnerable to downside if Draghi focuses on a “weak USD” and pushes back sternly against recent strength. Signs of comfort with current levels, in contrast, would act as a green light for the uptrend to continue."

“Our base case for a largely unchanged statement will disappoint those positioned for another hawkish step. With positioning stretched and spot overbought, EURUSD may be building to a near-term peak.”

“We think this is likely to remain temporary, however, and think a pullback would represent an attractive point to enter or build upon core longs.”

"We think that this month’s ECB meeting is too soon to make any changes to guidance, and that at the very least we need to wait until the March meeting when there are new staff forecasts at hand."

Kamal Sharma, FX strategist, Bank of America Merrill Lynch

“We do not expect any major change to forward guidance this week apart from the removal of the asymmetry in QE, which we do not think would be consequential.”

“We would expect Draghi to emphasize that any changes to forward guidance will only be gradual and that the sequencing (rate hikes only after net QE purchases are over) is something that will not be altered. Those expecting rate hikes at the end of this year may end up being disappointed.”

“The recent EUR appreciation risks Draghi airing on the dovish side this week. While Draghi did not push back against the Euro strength in September, surprising many, it appears there is a much broader consensus among the Governing council this time around that the move may be somewhat excessive.”

“While the December ECB Minutes have effectively consigned the QE era to history the cyclical outperformance of the EUR may have run its course and we believe the single currency is vulnerable to comments from President Draghi during the Q&A session who may take the opportunity to address the recent appreciation.”

“While much of the attention has been on the EUR/USD rate, it is worth emphasising that the EUR TWI is less than 0.5% higher since the start of the year. In this context, the appreciation of EUR is less impressive than the 2% rally in EUR/USD against the backdrop of broad-based USD declines.”

 

Jens Peter Sørensen, chief analyst, Danske Bank

“Recent concerns on the FX from GC members may have helped fade the rally in EUR/USD for now, and if backed by Draghi in the Q&A next week this could help EUR/USD move towards 1.20 short term.”

“However, we no longer expect a sustained dip below 1.20and further out, we look for 1.28in 12M.”

“Key topics for the Q&A: EUR appreciation, changing the forward guidance (FG) and the pace of FG changes, the dominance of hawkish messages in the financial press.”

“We believe that the increasing evidence of the strong growth supports an end of QE in 2018...but a rate hike will only come once inflation is on a self-sustained path towards the inflation aim of close to but below 2%."

 

Dr. Karsten Junius, CFA, chief economist, J. Safra Sarasin

"The strength of the euro against the US-Dollar has created some head scratching."

“The EUR/USD exchange rate continued its upward trend. Our analysis reveals that strong economic growth and the flatness of the US yield curve relative to the EUR are potential drivers for this trend.”

“So far, the euro appreciation is not too far from fundamentals for verbal interventions from the ECB-president. However, behind the scene, the ECB will take note. This is one reason why we argue in our ECB-preview that changes to the forward guidance are more likely to occur in March or April than at next week’s meeting.”

“Ultimately, it will be the inflation outlook that matters for how fast the ECB moves forward. We expect inflation to trough in February at 1.1% yoy (headline) and 0.9% yoy (core) and to move slowly towards around 1.5% yoy at year-end. In our view, this warrants a less generous monetary policy.”

 

Alan Lemangnen, economist, Natixis

"Financial conditions have tightened over the last couple of weeks, partly spurred by anticipations of an imminent shift towards a more hawkish communication."

"On the exchange rate side, Mario Draghi is likely to adopt a balanced rhetoric to downplay the risks on the inflation outlook."

"On the one hand, he should acknowledge that the euro appreciation reflects strong economic growth in the euro area."

"But on the other hand, he is likely to reiterate the well-known line of argument that, despite not being a policy objective, the exchange rate is a key element for the inflation outlook."

"Our base case scenario foresees the ECB to end the APP by September and to hike the DFR in March 2019. To facilitate a smooth transition, the forward guidance will focus increasingly on the ECB’s intention to keep interest rates unchanged for “an extended period of time"."

 

Philip Shaw, economist, Investec Bank

"Policy hawks such as Jens Weidmann and Ardo Hansson have argued in favour of a definitive halt to the APP later this year and providing the appropriate communication."

"This would differ from the ECB’s current language which states that the ECB is ready to increase the pace of quantitative easing, either in terms of size or duration. Moreover the programme may run beyond September if necessary."

"Others, seemingly the majority on the GC, will argue that despite the economy’s obvious positive momentum, inflation in the eurozone as a whole is not yet clearly on track to meet the ECB’s objective of ‘below, but close to 2%’."

"We expect no tweaks to its communication this time around. However by the next meeting in March the pressure for some change may result in some rewording. At that stage it might still be too early for the GC to close off its options to extend QE beyond September."

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