Home ECB Preview: Dovish And Slightly Worried – Danske
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ECB Preview: Dovish And Slightly Worried – Danske

The ECB meeting this week is highly anticipated, especially given the weak inflation numbers and the Chinese crisis.

What can we expected from the central bank? Here is the preview from Danske, and it doesn’t look good for the euro:

Here is their view, courtesy of eFXnews:

Overall we expect the ECB to sound dovish and slightly worried at its upcoming meeting on 3 September. The lower oil price together with the stronger effective EUR are challenging the ECB’s outlook for a sustained adjustment in the inflation path and, looking at the 5Y5Y inflation-linked swap rate, inflation expectations do not seem well anchored.

Already in the introductory statement we expect a more dovish tone from Draghi. Firstly, we expect him to include a sentence emphasising the open-endedness of the QE programme and secondly, we believe he will add that the ECB is ready to use all available instruments if needed. Moreover, Draghi is likely to put a lot more focus on the downside risks to the economic outlook following the latest developments in China together with the sell-off in equities.

Currently, we see a low probability of the ECB delivering imminent easing and we believe the ECB will first attempt to improve the inflation outlook by verbal intervention.

Related to this we have listed five factors including core inflation and activity figures, which we believe the ECB will monitor closely and which in our view need to start to deteriorate before the ECB decides to ease further.  If some of these factors start to worsen, we expect the ECB to step up its easing. In that case we view it as most likely that the ECB will extend the QE programme beyond September 2016, although it is also possible that it scales up the monthly asset purchases as the summer front-loading has already shown that the programme implementation is flexible.

The market is increasingly speculating on the ECB increasing its asset purchases and the theme is likely to continue based on a dovish stance from the ECB. The ECB’s inflation projection for 2017 could be crucial for how the market reads the ECB. We expect a slightly lower forecast for 2017, mainly driven by the lower oil price. However, the updated projections are based on a cut-off date in mid-August, hence they do not include the latest decline in the oil price and the strengthening of the EUR, implying they are too optimistic when released. Consequently, even if the ECB ends up being less dovish than the market expects, speculation about more easing could soon return.

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Yohay Elam

Yohay Elam

Yohay Elam: Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I've accumulated. After taking a short course about forex. Like many forex traders, I've earned a significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I've worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.