The ECB Needs To Surprise This Week: Here Is Why

EUR/USD is gaining ground two days ahead of the important ECB meeting. Is the market skeptical about Draghi’s abilities? Or is just the dollar’s weakness? Goldman Sachs explains what the ECB needs to do:

Here is their view, courtesy of eFXnews:

The ECB needs to surprise this week, not because of markets, but because – given the trend in core inflation – the existing policy mix is behind the curve. Given the political economy within the ECB and what is now priced in money markets, we think the biggest margin for surprise will be to step up monthly purchases and signal that “scarcity” is not a constraint, including via shifting away from the capital key.

Our rule of thumb is that an EUR 100 bn surprise on sovereign bond buying translates into one big figure down in EUR/$. Most important, beyond specific measures, we believe it is time for the ECB to step it up and reassert “monetary dominance” over all other interests.

…Ultimately, we think monetary dominance will reassert itself, given that the ECB has only inflation as its target. That is the underlying reason why we continue to hold to our 0.95 forecast for EUR/$ in 12 months.