EUR: Countdown to the Sep ECB meeting begins with EUR/$ 1.20 in sight - ING

The EUR continues to march higher despite ECB President Mario Draghi staying tight-lipped over future policy plans at Jackson Hole (as we expected), explains the analysis team at ING.

Key Quotes

“The focus now turns to the crucial 7 September ECB meeting; our economists note that the demand for an ECB game plan on tapering is getting stronger by the day; indeed the key arguments in favour of tapering are the successful defeat of the deflation risk, the strong economic recovery and bond scarcity. However, we note that the ECB’s preference will be for a cautious tapering, with a very gradual withdrawal of some monetary stimulus that ideally doesn’t cause any tightening of financial conditions. This includes concerns over adding fuel to the EUR rally, which may soon generate negative spillback effects (in the form of disinflationary pressures mainly) that will warrant some attention from the ECB.”

“This is where the type of tapering employed by the ECB could make a difference; unlike the Fed’s gradual reduction in monthly purchases, our economists believe that the ECB will most likely reduce the monthly purchases to €30bn in Jan-18, with an open-end to the programme but at least until Jun-18 and probably increasing the issuer limit and broadening maturities to grant itself maximum flexibility to scale back up once conditions warrant such a move. In the eyes of the ECB, the two-way risks to QE tapering could avoid an unwarranted tightening of financial conditions and keep any EUR upside contained. While a weak $ is part of the reason that EUR/$ has moved sharply higher, the ECB may try their best to keep us this side of 1.20.”