EUR & ECB Cribsheet for September meeting

Were it not for the strong euro, the September European central bank meeting on Thursday would probably have been a non-event.

Growth outlook hasn't deteriorated versus the last forecast (particularly in light of the prior pessimistic ECB projections) and although the CPI forecast is likely to be revised lower, the monetary policy set up is already very loose (i.e, material asset purchase via QE and PEPP, and deeply negative rates), raising the bar for differentiating and impactful additional easing steps.

While the some of ECB Council member's comments showed an uncomfortableness with the recent EUR strength, we think it is too early for the ECB to forcefully talk down the euro this week.

We don’t look for Trichet-like comments on a ''brutal'' EUR appreciation. Rather, President Christine Lagarde may highlight that the central bank monitors the euro closely while reiterating that the exchange rate isn't seen as a target. We also don’t expect the ECB to hint at the extension of the PEPP programme beyond 2021 just yet, suggesting that EUR/USD should not be affected much by the meeting.

Although the euro is on the ECB radar, we don’t expect potential verbal interventions to be strong enough to send EUR/USD materially and persistently lower as (a) there is not much the ECB can do (i.e, the depo rate is already negative, asset purchases are already large, and while the PEPP extension beyond mid-2021 is a possibility, it is unlikely to come this week and is in fact already expected by the market to eventually come in one of the next ECB meetings) and; (b) the case for a structural USD bear trend remains strong, with the Fed’s adoption of the Average Inflation Targeting strengthening the narrative for low US real rates for longer – which should, in our view, be the key driving force behind the USD weakness in quarters to come.