The Probability Of Different Outcomes To the ECB Meeting

europe euro exchange rate 4

© Grecaud Paul, Adobe Stock

The Euro is likely to weaken due to persistently low inflation 'staying the ECB's hand' at their policy meeting on Thursday.

Canadian Investment Bank (IB) TD Securities have provided explicit trading recommendations and target levels (on EUR/USD) for the week's hotspot for the Euro, Thursday's European Central Bank (ECB) rate meeting.

TD is overall bearish the Euro, seeing an aggregate 75% probability of EUR/USD falling to the 1.22's; the exchange rate is currently trading at 1.2409.


Base Case: 65%

The IB's base case scenario, which they apply a 65% probability to happening, is that the ECB will not change the language of its future strategy, or 'forward guidance' as it is called in central bank lingo, despite saying it would "at the start of 2018" back in the December 2017 meeting.

The specific language to be changed relates to the ECB's "easing bias" which is what they call the pledge that they stand ready to use more stimulus or quantitative easing (QE) if necessary.

In the press conference afterward, TD think Mario Draghi will dodge questions about altering the language of the forward guidance, saying, simply, that 'whilst the subject was discussed in the meeting there was not enough support from the governing council to agree on a change'.

Draghi is also likely to defend the 'easing bias' because of the reality of continued low inflation in the Euro-area and the possibility that further stimulus may still be required to combat it. 

Hawkish: 25%

TD assigns a 25% probability of a hawkish outcome which would see EUR/USD rise to 1.2555.

Within the hawkish expectation, they make a distinction between a 'Less Hawkish' and 'More Hawkish'.

The former 'Less' variety would see a change in the statement of forward guidance from a focus on the specifics of QE - in terms of size and duration - to a broader pledge of "looser for longer".

The more hawkish variation would see the promise to wind down QE uncoupled from the condition of seeing "sustained inflation" first.


Dovish: 10%

The least likely outcome for TD securities is that the ECB adopts a more dovish tone, by which it is meant that it is in favour of keeping stimulus going for longer than previously thought and interest rates low; to this, they assign a 10% probability.

In a dovish scenario, the ECB would not change the language of their forward guidance but would alter the statement to suggest that growth in the region was now 'past its peak'.

A dovish scenario would see the EUR/USD exchange rate fall to 1.2205.

In the press conference with president Draghi, he would state that inflation is still too low to for QE to be dispensed with in September. 

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