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ECB Preview: Eyes On QE Bias, Euro And What Draghi Does Not Say


Anticipation for Thursday’s European Central Bank policy decision has been fading over the last few weeks as experts and markets have slowly come to realize that the eurozone monetary authority is unlikely to provide big hints on its strategy for eventually winding down, or tapering, its asset purchase program.

The ECB’s latest interest rate decision is due at 7:45 AM ET (11:45 GMT) on Thursday with no major policy changes expected.

Most of the focus will be on ECB president Mario Draghi's press conference 45 minutes after the announcement, as investors look for more clues on when and how the ECB could start unwinding its massive quantitative easing (QE) program, valued at a monthly €60 billion ($71.7 billion).

Markets looking towards October for concrete details

However, consensus among analysts across the globe has recently pushed back their bets on when the euro area central bank will reveal details over its tapering plans.

46 of 66 economists in a Reuters poll taken from August 28 to August 31 expect the central bank to announce a change in October.

Just three weeks before the most recent survey, slightly over half of economists polled had said such an announcement would come in September.

Now, only 15 respondents expected it at the September 7 policy-setting meeting, with the other five economists suggesting that markets will have to wait until December.

That poll was also taken prior to the news from ECB sources cited by Bloomberg that bank’s Governing Council may not be ready to finalize their decision on next year’s bond-purchase plan until just a couple of weeks before the current program expires at the end of the year.

Grabbing any random analyst note to clients on ECB expectations, one is likely to find that the experts widely believe that Thursday is “too early” for any concrete details to be announced and that their expectations have shifted to the October 26 meeting.

Shift in QE bias

However, that doesn’t mean that Thursday’s statement and posterior press conference will have nothing to watch.

“We think that the ECB will hint at QE tapering, to be announced later in the year, by modifying its forward guidance,” Morgan Stanley (MS) wrote in its preview for clients.

“Rather than saying that it stands ready to increase the QE program in terms of size and/or duration, if needed, it'll likely drop any reference to the possibility of increasing the monthly purchases, while it'll continue to say that it could buy for longer,” these analysts explained.

Euro in focus

Furthermore, the ECB will present updated economic projections with an upgrade to the growth outlook and a slight reduction in inflation projections, making any remarks on recent euro strength a major focus of the meeting.

Indeed, as Draghi and team struggle to push inflation towards its 2% objective, several analysts have chimed in on the consequences of the strong single currency.

Societe Generale (OTCPK:SCGLF) calculated that a 10% appreciation in EUR/USD leads to a 30 basis point reduction in inflation over the next six quarters, while Goldman Sachs (GS) noted that a stronger exchange rate puts the euro area in a weaker position to absorb the negative impulse from global growth.

“We expect Mario Draghi to express concern about this and explicitly mention that the stronger euro is the main reason the ECB has lowered its inflation projection and that there is further downside risk,” analysts at Danske Bank wrote in their ECB preview.

“That said, Draghi will still have some hawkishness in his tone in our view (…) because growth momentum remains strong, which has previously been one of his arguments for why inflation will rise eventually,” they added.

ING economists agreed that the stronger euro will make the ECB more cautious with its tapering communication and suggested that the central bank has two options:

“Either announcing the details of a very dovish tapering starting in January hoping that full clarity brings back calm, or striking a cautious balance between giving first hints at the upcoming tapering and dovish sounds, like warning against the unwarranted tightening of financial conditions in order to calm FX markets,” they explained.

“As the ECB is probably not yet unanimous on the first option, we expect that Thursday will again be about what Draghi doesn't say, rather than what he does say,” these experts concluded.

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