Dancing to Draghi’s tunes
It's ECB day today, here are some of my lyrical thoughts
While President Draghi didn't quite deliver the hotly anticipated sequel to his 'whatever it takes' speech at Jackson Hole last month, today's policy meeting gives him an opportunity to take one of two positions:
1.Shed some light on the future potential policy normalisation options available, or
2. Stay tight-lipped as the Governing Council has yet to come to any meaningful consensus about how best to proceed next.
If the goal is to curb the current market optimism, then the former option – and providing some clarity and reassurances that the exit from unconventional monetary policy will be very gentle – may be the better road to take. Sure, it may cause a knee-jerk move higher in the EUR, but this would quickly fade if – as our economists suspect – the ECB's tapering options will err on the dovish side of the spectrum.
Conversely, in a market where the general presumption for the EUR in recent months has been 'the only way is up,' saying nothing – and keeping investors guessing – will do little to temper some of the more hawkish tail risks being priced in. In this scenario, a buy-on-dips strategy for the EUR will remain in place, with market bulls still singing to the tune of 'you say it best when you say nothing at all'.
Either way, central bankers are quickly learning 'they can't always have what they want'. With a sizable chunk of the EUR/USD move towards 1.20 a function of US and global politics, the role of the ECB may now be reduced to playing second fiddle - at least in the immediate future.
P.S. There is a third option - one where Mr Draghi says 'there ain't no stopping us now' when it comes to tapering. This gung-ho approach seems highly unrealistic, though as we've seen with the Bank of Canada - not all central bankers are averse to a strong currency these days.
Bottom line
The house view is for EUR/USD to break 1.20 today as this seems to be the inevitable direction of travel. However, the extent of the move above here - and whether we can stay there - will depend on the rhetoric of Mario Draghi.
Download
Download opinion
Viraj Patel
Viraj is an FX strategist at ING. He has been with the firm since January 2015 and covers developed markets. Prior to this, he worked at Barclays and the Bank of England. Viraj read Economics at the University of Cambridge and is currently working towards his CFA charter.
Viraj Patel is no longer part of the ING THINK team
"THINK Outside" is a collection of specially commissioned content from third-party sources, such as economic think-tanks and academic institutions, that ING deems reliable and from non-research departments within ING. ING Bank N.V. ("ING") uses these sources to expand the range of opinions you can find on the THINK website. Some of these sources are not the property of or managed by ING, and therefore ING cannot always guarantee the correctness, completeness, actuality and quality of such sources, nor the availability at any given time of the data and information provided, and ING cannot accept any liability in this respect, insofar as this is permissible pursuant to the applicable laws and regulations.
This publication does not necessarily reflect the ING house view. This publication has been prepared solely for information purposes without regard to any particular user's investment objectives, financial situation, or means. The information in the publication is not an investment recommendation and it is not investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Reasonable care has been taken to ensure that this publication is not untrue or misleading when published, but ING does not represent that it is accurate or complete. ING does not accept any liability for any direct, indirect or consequential loss arising from any use of this publication. Unless otherwise stated, any views, forecasts, or estimates are solely those of the author(s), as of the date of the publication and are subject to change without notice.
The distribution of this publication may be restricted by law or regulation in different jurisdictions and persons into whose possession this publication comes should inform themselves about, and observe, such restrictions.
Copyright and database rights protection exists in this report and it may not be reproduced, distributed or published by any person for any purpose without the prior express consent of ING. All rights are reserved.
ING Bank N.V. is authorised by the Dutch Central Bank and supervised by the European Central Bank (ECB), the Dutch Central Bank (DNB) and the Dutch Authority for the Financial Markets (AFM). ING Bank N.V. is incorporated in the Netherlands (Trade Register no. 33031431 Amsterdam).