The consensus narrative is that with rising inflation it is understandable that next week’s ECB meeting is live and that the confirmation of such has lifted the euro to ten-day highs, dragging the dollar broadly lower, suggests the research team at BBH.
Key Quotes
“However, to accept this is to accept the debasement of language. Until now, we dubbed central bank meeting that could result in action as “live.” For example, given that the Fed has not changed interest rates since the hiking cycle began in December 2015 outside of a meeting with a pre-scheduled press conference. Hence last month’s meeting in May was not live.”
“The ECB meeting is not “live” in the accepted sense. The ECB is not about to stop its asset purchases, which will run through September, and possibly tapered further in Q4. It is not about to raise interest rates, which even the consensus sees at least a year off. How is the ECB meeting live? It is now said to be live in the sense that the ECB will formally debate what happens after September.”
“Moreover, this is not really news. ECB executive member Sabine Lautenschlaeger, who incidentally would likely have to resign from the Board if Weidmann succeeds Draghi at the helm, was clear last month that such a debate was likely in June. Those of us that expected an announcement at the July 26 meeting had assumed a debate would take place before it.”
“ECB’s Praet speech today did not contain any new color. He told investors what they already knew. After the Easter distortions drop out, it is clearer that price pressures are moving toward the ECB target. And given what has happened to the euro and oil, it is not difficult to connect the dots and recognize the likelihood that the staff upgrades its forecasts for inflation. The last staff forecasts in March assumed the euro would average $1.23 this year and oil would average $65. The weaker euro and stronger oil prices point to upside pressure on measured inflation.”
“The euro reached $1.1770 early in the European session. That is a ten-day high. The 20-day moving average, which the euro had not seen since April 20 is found near $1.1750 today. There is a $1.1760 option for 542 mln euros that will be cut in NY today, and 1.8 bln euros struck at $1.1800 that will also expire.”
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