Pound Sterling Tipped to Fall Marginally vs. Euro on ECB Meeting: Analysts

- Euro comeback against the Dollar to hit the GBP/EUR cross

- Euro to benefit if ECB maintain view that recent slowdown in growth is temporary

- But Morgan Stanley Believe Sterling could recover vs. Euro

Mario Draghi in focus today

ECB President Mario Draghi's assessment of recent slower-than-forecast economic activity will be key © European Central Bank, reproduced under CC licensing

The main event today is the European Central Bank policy announcement at 12:45 B.S.T, followed by the press conference with President Mario Draghi at 13:30BST.

The Euro is seen to be under pressure ahead of the event which will see policy-setters update markets on their assessment of the Eurozone economy and intended future moves on policy settings. The EUR/GBP exchange rate has moved from a weekly high of 0.8775 to 0.8732, (GBP/EUR up from 1.1396 to 1.1452) while the EUR/USD rate has slid from a weekly high of 1.2270 to 1.2168 today.

Despite the softness seen in the Euro exchange rate complex in the run-up to the event, some fundamentally-orientated analysts remain surprisingly upbeat about the pair's prospects, with several adopting a strategic base-case scenario for the meeting which involves a small recovery for the single currency.

As such, there is the potential for the Pound-to-Euro exchange rate to decline if they are correct, particularly if the Euro fights back against the US Dollar which has been the dominant force in global FX over recent days.

Much of the Euro's weakness of late has in fact been a function of Dollar strength as opposed to Euro weakness, and any move higher in EUR/USD could likely hit crosses such as EUR/GBP hard.

"The EUR/USD exchange rate continues to be dominated mainly by moves in the US Dollar. That can also be proved with our own currency indices which show that the downside correction of the exchange rate over the past few days was driven by a strong Dollar rather than a weaker Euro," says Thu Lang Nguyen, an analyst at Commerzbank.

In as far as actual expectations for the ECB meeting go, none of the views so far expressed see the ECB changing policy or making any new announcements regarding the reduction of their stimulus programme, so analysis will be focused on nuanced changes to the vocabulary of the statement and Draghi's emphasis and choice of words in the press conference afterward.


Above: Diagramatic representation of potential targets based on a number of analyst views

Analysts at ING say their base-case expectations for the outcome of the meeting lies somewhere between a change in the ECB statement reflecting concerns about slowing growth and the maintenance of the 'status quo' message of Patience, Prudence, and Persistence (the three P's).  

"The risk to the Euro at Thursday's ECB meeting is that President Mario Draghi ratchets up his concerns over the outlook for the Eurozone economy - stemming from either slower cyclical macro dynamics and/or heightened trade and geopolitical uncertainties," says Viraj Patel, FX strategist at ING.

In such a dovish scenario Euro bulls would retreat en masse as odds for a 2Q19 ECB deposit rate hike would be slashed further. EUR/USD would fall back to 1.2100, from current 1.2176 (-0.62%).

We believe this would be equivalent to GBP/EUR rising by a lesser 0.24% which from the current spot price of 1.1440 would suggest a move up to about 1.1467.  

Alternatively assuming the ECB dismisses the current slowdown in growth as transitory ING's Patel "favours modest EUR upside going into the meeting. A reiteration of the status quo constructive domestic economic outlook - with growth and inflation expected to broadly recover over the ECB's forecast horizon."

This "could keep lingering EUR bulls excited over the prospects of a mid-2019 rate hike (current implied probability at 60%)," says Patel.  The status quo scenario would see EUR/USD rise to 1.2350, which would be equivalent to a move from GBP/EUR's current spot of 1.1440 to around 1.1387.


Image (C) ING

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Analysts at TD Securities meanwhile say their base-case scenario for the meeting is for Draghi to largely dismiss the current slowdown in growth as temporary and to focus on a more positive medium-term outlook, in which the forecast for inflation would, most significantly, remain unchanged.

In such a scenario (with a 75% probability) EUR/USD would be expected to remain muted, with a marginally positive reaction toward 1.2240 (a rise of 0.36% from the assumed spot of 1.2190). This would translate into a move down for GBP/EUR to  1.1400, possibly even lower.

Cheat sheet from TD Securities

Image (C) TD Securities

Stephen Gallo, an analyst at BMO Capital, says his base-case expectation (to 70% probability) is for the ECB to continue with its status quo of PPP, and Draghi's position little changed from his speech of April 20.

"Thursday’s ECB statement and press conference probably won’t be materially different from Draghi’s April 20 remarks, when he stressed patience, persistence, and prudence regarding monetary policy and the normalisation process," says Gallo.

"Although he signalled that the Eurozone was probably past the peak of the ‘growth cycle’, from his vantage point, growth momentum will remain positive. All in all, this is a fairly balanced set of remarks," continues the analyst.

If the ECB statement is in line with Draghi’s tone during the press conference Gallo expects a slightly positive impact on the Euro, however, he would seek to fade versus the Dollar because of the latter's run of strength - not so, one assumes, versus the Pound.

Quantifying the change to the exchange rate, Gallo places the expected change versus GBP at +0.17%, which translates into about 20 basis points, or a fall from 1.1440 to 1.1420.

EUR expectations from BMO Capital

Image (C) BMO Capital

The Pro-Sterling Case

Not all analysts are unanimous in expecting the Euro to advance on Sterling.

The British Pound is being favoured to advance on the Euro over the short-term according to analysts at Morgan Stanley who are eyeing the European Central Bank's meeting on Thursday as one potential catalyst that might facilitate such a move.

The ECB "presents an opportunity for President Draghi to push back against EUR strength in light of the weaker realised data. EUR crosses thus look vulnerable, particularly against GBP, where real yield convergence should keep EUR/GBP trading lower," says Hans Redeker, chief strategist at Morgan Stanley.

The inverse of EUR/GBP trading lower is, of course, GBP/EUR trading higher. The call comes as the GBP/EUR pair has fallen back down to 1.1435 at the time of writing which means the exchange rate is back in the confines of a familiar range which it has inhabited for six months.

But markets are expected to stay nervous of the single-currency ahead of the event, and we have noted this could be why Sterling-Euro is finding support at the 1.14 level.

"For the EUR, concerns about the growth outlook could prompt the ECB to be less tolerant of a stronger EUR, and with the ECB meeting coming up, the risks to EUR downside remain," says Redeker.

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