Euro torn between ECB chatter & Friday’s CPI

<p>The euro pushed up across the board today on a wire story from unnamed ECB sources that any “action [from next week’s ECB policy meeting […]</p>

The euro pushed up across the board today on a wire story from unnamed ECB sources that any “action [from next week’s ECB policy meeting is] unlikely next week, although much depends on August inflation” data. Markets await Friday’s crucial release of the preliminary eurozone August inflation report, expected at a fresh four-year low of 0.3% y/y from the prior 0.4%.

Such ECB chatter, although unconfirmed, came as a surprise to most market participants who had begun anticipating a further rate cut in next week’s ECB Governing Council meeting via a 10-basis-point reduction in the interest rate corridor; the difference between the ECB’s marginal lending (ceiling) and deposit (floor) facilities, from the current 25-bps gap.

Another reason for markets to expect some sort of action in next week’s meeting is the relatively dovish speech from Draghi at Friday’s Jackson Hole conference, where he acknowledged the inflation slowdown to have become “even more significant”. Draghi added: “The real rates on the short and medium term have gone up…[and the] Governing Council will acknowledge these developments and within its mandate use all the available instruments needed to ensure price stability over the medium term.”

Also on tap in next week’s meeting are ECB staff forecasts on CPI and GDP growth, both of which are expected to be revised down for 2014 and 2015, with little or no change for 2016 projections.

Finally, the ECB should be expected to unveil its latest progress on starting purchases for asset-backed security (ABS) and its role in contributing to further credit easing and liquidity expansion in the eurozone.

FX impact

Friday’s CPI release (due 10am BST) will likely trigger fresh euro selling in the event of a sub 0.4% figure, but any upside surprise may be seen as a trigger for a short-lived bounce ahead of next week’s ECB decision. With EUR/USD and EUR/AUD extending declines towards the targets mentioned in our 12th August article, EUR/JPY remains well above our objective as a result of the broad yen decline due to rallying equity markets and intensifying risk-appetite. Although EUR/JPY is on its way to posting the fifth consecutive monthly decline (longest losing streak since 1999), there remains further spoke for ongoing declines towards the 135.00 figure, marked by the July 2012 trendline support.


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