Euro: The ECB meeting is on Thursday … but … "What would ECB disappointment look like?" via ForexLive

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We've got a much anticipated ECB meeting coming up on Thursday.

A BNP Paribas client note asks “What would ECB disappointment look like?”

First up, though, what they expect and how they are positioned:

  • We are looking for a 10bp rate cut this week by the European Central Bank
  • Our economists expect minor downward revisions to the ECB's growth and inflation projections
  • Ahead of this week's meeting, we are short EURGBP and EURCAD with targets of 0.76 and 1.38 respectively

Then, the note goes on (bolding mine):

  • However, there is room for President Draghi to disappoint, particularly given discomfort by a contingent of governing council members who would oppose further action at this juncture
  • According to our economists, no rate cut and no major change in language to the ECB statement would be a key disappointment
  • President Draghi's responses in the Q&A will be key, particularly when he is asked about further action (QE included). This is a key area for market disappointment.
  • If he continues to say broad based asset purchases are an option and wants to wait and see, that would be a mild disappointment as it would offer nothing in the way of new news into the governing council's thinking
  • If he avoids the question, that would be an even bigger disappointment.
  • If they deliver the rate cut and say they will monitor and take more action if necessary, such a holding operation will keep EUR on the weakening trend
  • The largest scope for disappointment is if they do not do anything and provide no further information on QE as well

On the euro:

  • EUR is increasingly trading like a funding currency in the sense that the ECB is likely to keep interest rates low for an extended period of time
  • … in stark contrast to solid expectations that both the Fed and the BOE are contemplating the timing of the start of the tightening cycle
  • EUR weakness is less a function of whether the ECB ultimately initiates a policy of QE but rather the stark divergence between policy outlooks among major central banks
  • We are happy to maintain our current short EUR cross recommendations (vs CAD and GBP). If President Draghi reiterates his comments made at the Jackson Hole Symposium, the trend of EUR weakness will remain in place

posted via ForexLive

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Posted In: FuturesForexGlobalEconomics
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