ECB Minutes Preview: How Dovish Is Draghi? 3 Things To Watch

• The ECB's meeting minutes will unveil the discussions that led to the dovish end to QE. 
• The EUR/USD is set to move on any changes in tone.

The European Central Bank will release its Monetary Policy Accounts on Thursday, July 12th, at 11:30 GMT. The document provides further detail on the consequential June 14th meeting that sent the EUR/USD tumbling down some 200 pips.

Back then, the central bank announced a halving of its bond-buying scheme to a rate of €15 billion in Q4 2018 and an end to purchases from 2019. The announcement was on the cards, and the market was surprised by something else the ECB pledged to keep rates unchanged through the Summer of 2019.

Both announcements were accompanied with conditions that were one-sided: the Frankfurt-based institution may push back on both tightening moves in case of deterioration but not accelerate the process. Adding a skeptical tone in his press conference, Draghi dragged down the Euro. 

The potent meeting in June makes the minutes more significant than usual.

Here are three things to watch:

1) Level of disagreement with the hawks

The ECB is split between a majority dovish camp led by Draghi and a hawkish minority camp led by the German Bundesbank President Jens Weidmann, who remains the leading candidate to succeed Draghi in November 2019. 

Reports have come out from "ECB sources" that Governing Council members see late 2019 as "too late" for a rate hike. The news sent the EUR/USD spiked up alongside with the odds of the rate hike as reflected in bond markets. 

But how influential are these "sources"? Are they the usual hawks or do they have more support? The language of the meeting minutes may help solve the mystery. If the pledge to leave rates unchanged and the accompanying conditionality was supported by a broad majority, the Euro could suffer. A more divided council and a rift between the two sides could send the Euro higher. 

2) Views about trade

Another news report regarding the central bank discussed growing worries about Trump's trade tariffs and the consequences for the European economy. They are more worried than they are ready to admit, said that news item. While some have spoken out, most do not dwell on the topic.

The meeting minutes may shed some light on this topic as well. If a significant part is dedicated to global commerce and if the ECB sees it as a growing risk that could impact monetary policy, the Euro could suffer. Ignoring the topic will allow it to gain ground.

The publication comes at a sensitive time, just as US President Donald Trump meets his NATO peers. Trump tied trade to security many times.

3) Energy inflation turning into core inflation

The recent inflation report showed an acceleration in headline inflation to 2 percent and a drop of core inflation to 1 percent. Oil prices are on the rise, partly due to Trump's abandonment of the Iran deal, and this explains the headline. The moderation in economic growth goes hand in hand with the sluggish rise in core prices.

If energy prices remain high for an extended period, increases in energy prices may filter through to other expenses. In the ECB jargon, this is called "secondary effect." A tertiary effect may be unions demanding pay raises.  

So far, we have not seen any of those effects, but the ECB is thinking for the long term. 

The reaction may be trickier. If the ECB welcomes this rise in core prices, it would be bullish for the euro. However, if the ECB were to talk about it and dismiss it, the Euro could fall.

All in all, if all three factors go in a specific direction, the EUR/USD will react strongly. If they send mixed signals, the reaction could be similar as well, with little movement.