Will Draghi Drag The Euro Back Down? Preview

The European Central Bank convenes to make its mid-summer decision and they probably planned not to rock the boat too much. However, given the recent rise in the euro and also in bond yields, they might want to cool tapering expectations back down.

In the past, Draghi managed to drag the euro down. Will he succeed this time as well? Here is a preview of the ECB meeting on July 20th.

EUR/USD on the rise

ECB President Mario Draghi tried to remain cautious and balanced: acknowledging and taking credit for growth while remaining worried about inflation and stressing a very gradual exit. However, markets reacted very positively to his speech in Sintra, Portugal. The talk about reflation replacing deflation and a gradual exit sparked a euro rally.

In addition, the planned speech at Jackson Hole in late August is seen as a “warm up” to a big announcement about QE tapering in the all-important September meeting.

The strength of EUR/USD was extended with the recent weakness of the US dollar and is probably frowned upon. On this background, Draghi might try and dampen expectations for a quick exit from the QE program.

Gradual tapering and exit

The ECB is set to buy 60€ worth of bonds until the end of the year. The big question is: what’s next? Some kind of reduction in bond-buying is expected in 2018. Once this reaches an end, the ECB may raise rates, maybe only in 2019.

The meeting in July does not consist of new forecasts, such as the one in June and in September. Nevertheless, the ECB may take further baby steps towards the exits. They could remove the clause stating that the QE program may be increased in size and duration. This is a first step towards reducing it.

Draghi may also say that a discussion about QE tapering happened in this meeting. He will not disclose any details. Tapering can mean a reduction to 40 billion euros for a few months or remove 5 billion euros on a monthly basis. The end date of bond buying is also unclear.