ECB to hold fire, but EUR unlikely to sustain any move higher - MUFG

Derek Halpenny, European Head of GMR at MUFG, suggests that now that the summer trading period is behind us following yesterday’s Labor Day vacation in the US, the focus of financial market participants will be very much on the upcoming monetary policy events that may well shape the tone in the FX markets through the remainder of the year.

Key Quotes 

“The key announcements come later – the BoJ and the FOMC decisions on 21st September – but ahead of that on Thursday we have the ECB monetary policy announcement.

We had for some time been calling for an extension to the deadline for QE to be announced at the September meeting but our sense now is that the ECB may well delay that announcement until the October meeting or possibly the December meeting. As usual, the reaction in the markets and for the euro will very much depend on the tone of comments from President Draghi. What is clear is that an extension to the QE timeline is widely expected by the financial markets and as long as President Draghi makes clear that this is likely to be forthcoming rather than being abandoned, then the upside for the euro should be limited.

The abandonment of extending QE is highly unlikely and indeed, the data and continued subdued inflation points to the need for additional monetary easing. The ECB will also release updated forecasts and given the subdued growth in Italy and France and some recent disappointing business sentiment readings from Germany, the chances are that the ECB growth projection for 2017 might be cut modestly, from 1.7% to perhaps 1.6%. While the 2016 inflation forecast of 0.2% might be revised higher modestly (the average annual rate year-to-date is currently between 0.3-0.4%), the 2017 and 2018 levels should remain unchanged.

We certainly do not see the ECB meeting this week as being any catalyst for a notable move one way or the other and while a delay in announcing a QE extension might be EUR supportive, we expect President Draghi to be explicit enough in providing forward guidance that reassures market participants that further easing will be forthcoming. In addition, President Draghi will signal technical changes to address concerns over sovereign debt securities becoming too scarce for the ECB to meet its monetary policy commitments.”