ECB Focus For Sure, But Not Only Game In Town

The US dollar is trading broadly lower. The ECB meeting looms large. Many, like ourselves, expected that when Draghi said in July that the asset purchases would be revisited in the fall, took it to mean, after the summer recess, not a legalistic definition of when fall begins. Still, there have been some reports, citing unnamed sources close to the ECB, that have played down such expectations, and warn a decision on next year’s intentions may not be announced until October or even December. 

Such reports have helped steady the euro below $1.20. It traded above there only on one day (August 29). It had appeared that at the end of last week, the euro was heading there after the disappointing US jobs data, but was turned back by one of those reports citing anonymous officials. Despite the poor close last week (~$1.1860), the euro has recorded higher lows each day thus far this week and higher highs.  

The ECB meeting provides new staff forecasts. The supposed leaks warn that GDP may be tweaked higher, but inflation shaved. Lowering inflation forecasts is more dovish than raising GDP is hawkish. Barring a hard stop, which has been dismissed as potentially disruptive, the ECB must extend its purchases. The evolving language of the ECB’s statement suggests a tapering. We suggest that the consensus view of a reduction of monthly purchases to 40 bln euros for six months would be a dovish signal as it points to continued purchases in H2 18, while a cut to 30 bln euros would give officials flexibility to end the program at mid-year. 

The failure of the ECB to make such an announcement today could spur pullback in the euro, but it may prove short-lived if the delay is just until next month. There is little doubt that Draghi will address the strength of the euro.And even if he discusses it in his prepared remarks, surely reporters will pepper him with questions about it at the press conference. Draghi, as other ECB officials have done, will likely recognize that part of the euro’s appreciation is a function of better economic and political prospects in the euro area. We imagine he will also caution that continued appreciation could pose a headwind to the recovery.