ECB Preview: Euro Strength and More Dovish Calls

The value of the Euro could be in focus as the ECB aims to address negative inflation and the until recently surging value of the currency.

Charts (4)

Thursday 10th September

What to expect?
The value of the Euro could be in focus as the ECB aims to address negative inflation and the surging value of the currency.

After the Fed made a dovish policy framework shift by adopting average inflation targeting, other central banks, such as the ECB will need to make dovish noises if they don’t want their currency appreciating too much.

Owing to Chief Economist Philip Lane we know that the ECB is wary of the Euro’s strength. Thanks to his comments that Euro US Dollar rate matters and a rebound in greenback demand the EUR has fallen away from recent two-year highs.

The ECB President Christine Lagarde could build on Philip Lane’s remarks, flagging the currency’s appreciation and the problems that this brings for business and inflation, boosting the need for additional support. However, policy action is unlikely to happen just on the back of a strong Euro. The ECB has historically acted when Euro strength is a reflection of improving economic conditions. 

We are not expecting much in the way of action mainly due to the limited room for manoeuvre. With rates at -0.5% a rate cut now look is unlikely. Furthermore, more QE leads to the Euro rising (Euro soared since €750 billion rescue fund). With this in mind the most likely course of action will be trying to talk down the Euro

New Economic Forecasts
The latest economic forecasts will be released at this meeting.
The ECB could acknowledge the strong rebound in the economy post lockdown, however they are also likely to remind of continued uncertainty. ECB members hitting the airwaves recently have shown that differences over the central bank’s economic assessment exist. 

Inflation will be very much in focus, particularly following August’s dire inflation print. CPI turned negative -0.2%. A downward revision to the already very low 0.3% forecast could be on the cards. This could provide some guidance as to how long the loose monetary policy could continue for.

In June the inflation projection was 1.3% for 2022. The rise in the value of the Euro could trigger a further cut in the ECB’s inflation forecasts. Any downward revision of inflation could increase the chances of additional stimulus.

The central bank will almost certainly say that it stands ready to ease policy further if required to boost inflation.  However, we expect this meeting to be more talk and less action paving the way for additional stimulus later in the year.

The EUR/USD is extending losses for a 6th straight day on Wednesday. The pair is testing near term support at $1.1750 as it continues to pull back from the 2 year high of $1.20 reached last week.
A break through this level could see losses extended to $1.17 the confluence of a horizonal support and 50-day moving average, a level which has offered support since late July. A break through here could open the doors to US$1.15.
On the flip side resistance can be seen around $1.1860 prior to $1.1970.

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