ECB Preview: Focus likely to be on the euro - Danske Bank

According to analysts from Danske Bank, the main focus at next week European Central Bank meeting is likely to be how big a problem the current pace of euro appreciation is for the bank. 

Key Quotes: 

“The main focus at the ECB meeting is likely to be how big a problem the current pace of euro appreciation is for the ECB. We expect Mario Draghi to express concern about this and explicitly mention that the stronger euro is the main reason the ECB has lowered its inflation projection and that there is further downside risk. That said, Draghi will still have some hawkishness in his tone in our view. This is because growth momentum remains strong, which has previously been one of his arguments for why inflation will rise eventually. However, as Draghi said in July, a financial tightening is ‘the last thing’ the ECB needs.”

“Although we do not yet expect the ECB to announce any decision about how QE will continue beyond the currently communicated horizon, we believe there will be a lot of discussion about the future QE path. A topic in the discussion is likely to be the economic and financial impact of the total stock of QE versus the effects of the monthly flow of the purchases, which was already attracting some attention in July, as revealed by the ECB minutes. Additionally, some ECB members have started to talk about the impact on the economy of the composition of the QE purchases and we expect this to be part of the discussions. 

“Finally, we also expect the effects of the reinvestments to be important in the decision about the future QE path. Overall, we still believe the ECB will continue its QE purchases but at a reduced pace of EUR40bn per month in H1 18. We expect it to announce this at the next meeting in October but with some signalling of it at the upcoming September meeting.”

“An ECB set to address the pace of EUR appreciation should help put a lid on EUR/USD near term. However, with the cross back around pre-Jackson Hole levels, the FX market should at least partly be ready to absorb some EUR worries from the ECB without this spurring a significant sell-off from here. We maintain our view that dips in EUR/USD will be shallow and shortlived, as the underlying forces for euro strength are strong in the current environment.”