The ECB Governing Council meeting is scheduled for today. The new set of macroeconomic projections will reveal, for the first time, the ECB’s assessment of the Brexit impact on the Eurozone economy, although Draghi may want to be on the safe side and stress the preliminary nature of the estimates as well as higher-than-usual uncertainty surrounding the numbers. Given the generally good resilience of survey indicators after the UK referendum, we only expect slight downward revisions to the growth outlook with most of the hit felt next year, with the GDP forecast lowered towards 1.5% from 1.7%. The softer growth trajectory implies a bias for a marginally weaker CPI path, mainly for core prices, but we doubt that any revision will exceed a decimal per year. Moreover, oil prices have recovered some ground after the cut-off date of mid August and the Governing Council may try to factor this into its broader assessment. Overall, we think that the new projections are unlikely to be a clear trigger for the announcement of new stimulus today.
Other factors argue against immediate action. First, there are some important risk events scheduled in the fourth quarter 2016, namely the Italian referendum and the US election. Although we expect none of these events to materially damage the macro and financial outlook, the ECB may find it wise to keep some powder dry. Second, there are still six months to go before the end of QE and a good dose of stimulus from previously announced measures is still in the pipeline. Third, the ECB is not willing to make it any harder for the Fed to normalize its monetary policy. If the EUR were to resume a depreciating trend in response to immediate ECB easing, the FOMC might have second thoughts about the timing of its next rate hike, with obvious consequences for the USD and, maybe, also for investors’ mood. This is a risk the ECB does not want to take.
In our opinion the bar for a further step-up in the monthly pace of purchase seems to be fairly high, mainly due to the intensification of scarcity problems that this would cause and the thorny countermeasures the ECB may have to take. We remain convinced there will be no change to policy rates, as the side effects of an even more negative deposit rate would outweigh the benefits.
No action today is likely to support the EUR/USD. We stay long and raised the target to 1.1390 on our short-term position.
GrowthAces.com - Daily Forex Signals
Other factors argue against immediate action. First, there are some important risk events scheduled in the fourth quarter 2016, namely the Italian referendum and the US election. Although we expect none of these events to materially damage the macro and financial outlook, the ECB may find it wise to keep some powder dry. Second, there are still six months to go before the end of QE and a good dose of stimulus from previously announced measures is still in the pipeline. Third, the ECB is not willing to make it any harder for the Fed to normalize its monetary policy. If the EUR were to resume a depreciating trend in response to immediate ECB easing, the FOMC might have second thoughts about the timing of its next rate hike, with obvious consequences for the USD and, maybe, also for investors’ mood. This is a risk the ECB does not want to take.
In our opinion the bar for a further step-up in the monthly pace of purchase seems to be fairly high, mainly due to the intensification of scarcity problems that this would cause and the thorny countermeasures the ECB may have to take. We remain convinced there will be no change to policy rates, as the side effects of an even more negative deposit rate would outweigh the benefits.
No action today is likely to support the EUR/USD. We stay long and raised the target to 1.1390 on our short-term position.
GrowthAces.com - Daily Forex Signals