8 March 2018
ECB preview: Angry birds

The tension between a small but vocal minority of hawks and the still large majority of doves seems to be increasing. Today's ECB meeting will offer some new insights on who is currently on top in this bird fight

For months, the macroeconomic situation faced by the ECB has hardly changed. The Eurozone is enjoying a strong recovery, which if anything has gained momentum over the last few months. At the same time, inflationary pressures remain low. For now, the expected inflation pick-up on the back of a strong cyclical recovery is more wish than reality. The latest announcement of possible trade sanctions from the US should have increased the ECB's vigilance.

ECB positives may equate to a high-flying euro

For ECB President Mario Draghi, today is all about managing expectations. Here's what we think he'll say and how markets are likely to react

EUR: Series of small ECB positives may equate to a punchy move higher

  • The ECB meeting today will take place at a time when global markets are at a pivotal juncture, which could make for a fairly interesting (or entertaining) press conference with President Mario Draghi. From the ECB chief’s perspective, it’ll all be about managing expectations and sending nuanced signals. For markets, we’ll be looking to infer what role the global external environment (ie stock market volatility and US protectionism) is playing in the ECB’s policy reaction function.
  • We expect the following combination of developments from the ECB meeting today to be broadly supportive for the EUR: (1) a subtle change in the ECB’s forward guidance to keep markets on their toes over the potential end to QE asset purchases this year; (2) no attempts by President Draghi to actively talk down the euro; and (3) an upward revision to the ECB’s growth profile (2018 GDP nudged up to 2.4%), while no change to the CPI profile (2018 at 1.4%).
  • While we don’t expect any explicit QE end date to be announced today, the ECB dropping its willingness to “increase QE in size and/or duration” would be an implicit step forward towards the end of asset purchases – and might just be enough to appease the dissenting hawks within the Governing Council.
  • On the currency front, expect “volatility” in the euro to be cited as a “source of uncertainty” – although this is merely a matter of fact within the context of central bank policymaking. Only direct concerns over the level of the FX – for which we think there are little grounds for justification (pointing to the flat-ish trade-weighted EUR since Feb) – would actually spook EUR investors.
  • Looking ahead, markets remain relatively underprepared for the next stages of ECB policy normalisation. The short-term 3-year forward EZ OIS rate is still around 50bps below its level when the ECB began easing in summer 2014. A re-pricing here this summer will set EUR/USD on a path towards 1.30 in 2018.

With the US dollar trading soft, these small positives could amount to a fairly punchy move higher in EUR/USD today – with a potential test of 1.25 on the cards (key resistance levels to monitor are first 1.2435/45 – and then 1.2505/15).

Reading time around about 3 minutes

ECB meeting: Angry Birds

At today's ECB meeting, we expect no hint of when QE could end, but we'll be watching the language closely. The subtle change in words should give a good indication of who is currently on top in the ECB’s in-house bird fight.

However, ECB members shouldn't forget when real bird fights, everyone loses some feathers

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