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ECB says won't be Spooked by Slowing Eurozone Growth, Euro Seen higher

© European Central Bank, reproduced under CC licensing

- ECB not spooked by slowing Eurozone data.

- Falling growth, Italian clash, Brexit and "trade war" being monitored

- Analysts give their views on implications for Euro.

The European Central Bank (ECB) kept interest rates and guidance unchanged in their October policy meeting but acknowledged a slowdown in Eurozone economic growth.

Speaking after the ECB's October policy announcement, ECB President Mario Draghi said "incoming information, while somewhat weaker than expected" remains overall consistent with the ECB's expectations for a steady pickup in growth and inflation, therefore the Bank does not yet appear worried by a recent slip in economic activity.

“Our monetary policy measures continue to underpin domestic demand, private consumption is fostered by ongoing employment growth and rising wages," says Draghi.

The steady hand shown by Draghi was welcomed by foreign exchange markets concerned the ECB might strike a more dovish tone which would in turn send the Euro tumbling lower. The Euro-to-Pound exchange rate is seen trading higher at 0.8861, giving a Pound-to-Euro exchange rate of 1.1285.

The Euro-to-Dollar exchange rate is quoted a quarter of a percent higher at 1.1428.

Eurozone economic data has surprised to the downside over recent weeks and foreign exchcange markets were at risks that the ECB sounded a dovish note and hinted they might keep quantitative easing rolling beyond the December end date.

"Have we changed the baseline scenario? The answer is no," says Draghi.

Risks associated to protectionism, financial market volatility and emerging market uncertainties “remain prominent” requiring easy monetary policy to remain in place over the medium term. The showdown between Italy and the European Union did not feature as a significant concern to the ECB.

Michael Metcalfe, global head of macro strategy at State Street Global Markets says it is what the ECB is not saying or doing regarding Italy that is perhaps the most noteworthy.

Under current market conditions there is tentative evidence of Italian troubles leaking into Spain yet "there are few signs that the ECB will reinstate the Outright Monetary Transactions (OMT) or a similar policy tool that would allow them to quell a dislocation in fixed income markets without a country first being part of a full bailout program," says Metcalfe.

"Nor is there any explicit guidance on potential changes to the ECBs reinvestment policy. Whatever it takes, is on the brink of becoming whatever it took," adds the analyst.

The central bank has said it will stop buying European government bonds at the end of the year and that it could begin to raise interest rates once "through the summer of 2019".

This would bring an end to the quantitative easing programme that has seen it hoover up bonds, thereby pumping cash into the Eurozone economy and stimulating inflation.

The ECB's policy pledges are what has prevented the Euro from handing all of 2017's double-digit gain back to a resurgent U.S. Dollar this year, but those commitments are contingent on an economic performance that supports a sustained return of inflation toward the central bank's target of "close to but below 2%".

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Analyst Previews

Antje Paefcke, analyst, Commerzbank

"If the FX market should be hoping that today’s ECB meeting will reveal when exactly the ECB is thinking to hike its key rate it will be disappointed again. ECB President Marion Draghi is going to provide little information on that. For now he will probably continue to sound optimistic about growth in the euro zone despite the recently disappointing PMI and despite the risks (e.g. trade war). So does that mean that Draghi will turn into a magician at the press conference allowing the euro to regain its allure? Hardly."

"The weak growth that is emerging is coming at a bad moment. Even though the market is now more worldly wise as regards the Italian budget deficit. Draghi will also try to comment as little as possible on the subject, so the market can be a little more relaxed. The issue will not be whether the EU will start a long-winded procedure that might eventually end in sanctions or penalties. What matters is how the market will react if Italy decides to behave in an unreasonable manner." 

 

Viraj Patel, FX strategist, ING Group 

"The attention shifts from Rome to Frankfurt today as the October ECB meeting takes centre stage. As ING’s Carsten Brzeski aptly laments, what a difference six weeks can make. If anything, the downside risks to the Eurozone growth story have increased (as the latest PMI readings show). Stock market turmoil, mixed hard data for the month of August and further tensions in emerging markets have added to what the ECB often calls ‘global risks’. And that’s without talking about the big elephants in the room (the Italian budget and Brexit stalemates)."

"Still, we don’t expect any shock U-turn on the ECB’s plans to end QE at the end of 2018 – and while one can expect a slightly more dovish Mario Draghi today, we note that a lot of bad news is already priced into the single currency. Hence, we may need to see a very strong dovish signal from the ECB chief today – one that maybe opens the door to a U-turn on the end of QE – for the EUR to drop much further from here. This seems highly unlikely in our view – and so look for EUR/$ to find support around 1.1390-1.1400 from a nonchalant Draghi today." 

 

Derek Halpenny, head of FX strategy, MUFG

"The euro has currently lost some of its safe-haven appeal given recent disappointing economic news. The euro-zone Composite PMI yesterday was the latest, following guidance from the Bundesbank that German GDP growth may have stalled in Q3. The global economic and financial markets backdrop will make the ECB much more concerned and this will probably be on show this afternoon when President Draghi gives his monetary policy press conference."

"We expect President Draghi to express some concerns about the outlook for growth as it’s now more likely that the ECB GDP forecast of 2.0% in 2018 will not be achieved. QE will still end on schedule and at this stage there is no need to debate the wording on the timing of the first rate increase. So, we do not expect any notable shift from the ECB today and a formal switch to acknowledging downside risks to growth would be a surprise to us."

 

Neil Mellor, currency strategist, BNY Mellon

"Mario Draghi has shown little inclination to deviate from a script of cautious positivity in recent ECB press conferences, but this strategy is not without its evident challenges."

"A slowing domestic economy will be challenging enough for the ECB, but black clouds are rolling in from stock turmoil and ‘trade wars’. The ECB trimmed its eurozone GDP growth forecasts for the latter reason last month, and in recent weeks the evidence that such risks are manifesting in weaker activity has become increasingly apparent."

 

Jessica Hinds, economist, Capital Economics 

"The further fall in the Ifo Business Climate Indicator (BCI) in October suggests that while the German economy is still growing at a decent pace, we are unlikely to see a return to the rates of growth seen last year."

"We see GDP rising by around 1.8% this year and next. But with other euro-zone economies experiencing a more marked slowdown, the ECB is likely to stress at its meeting later today that it will proceed cautiously in normalising policy."

 

John Hardy, chief currency strategist, Saxo Bank 

"Today, pity ECB president Mario Draghi, who will have a tough time spinning a positive story on the bank's pulling of the asset purchase plug."

"The European Central Bank faces a challenging narrative today as its forward guidance has it on a preset path of winding down asset purchases over the next couple of months to zero and then looking forward to a first rate hike sometime around mid-next year."

"But how does the ECB spin the situation if the economy continues to lose altitude and as the FT points out, Draghi will face intense questioning on Italy and Brexit at today’s press conference. I don’t envy Mario’s hot seat today. Hard to see how his comments catalyze any fresh moves in the euro."

 

Boris Schlossberg, FX strategy, BK Asset Management 

"Today's ECB meeting will be the primary focus of the day, although markets do not anticipate any change of policy. Still, despite ECB's deep desire to normalize policy in the region as soon as possible, downside risks have increased markedly since the month prior. Most of the risk has come from the politics, with Italian budget battle dominating the headlines. A compromise on the issue does seem likely and the faceoff between Rome and Brussels could add to the pressure in Italian bond markets."

"In addition to Italy, the German state of Hesse is holding elections this Sunday and Angela Merkel's centrist coalition is expected to see historic losses which could make governing more difficult and could even trigger fresh elections. Ms. Merkel has been the glue that holds all of EU together and any threat to her leadership would be a much more serious blow to the euro than any spat with Italy. If Germany, which is the economic and political engine of Europe, sees an uptick in populist power, the threat to EURUSD could be existential."

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