Jane Foley, Senior FX Strategist at Rabobank, suggests that the EUR is now on alert for a ‘live’ ECB meeting next week as according to a Bloomberg news report yesterday, the ECB sees the June 14 meeting as an opportunity to debate an exit from QE.
Key Quotes
“The hawkish implication of this headline boosted the EUR late in yesterday’s session. This morning there was further follow through for the single on comments from the ECB’s Praet that “signals on convergence of inflation have improved”.”
“Although the economic fundamentals could be aligning for a less accommodative policy from the ECB, politics is casting a cloud over EU coherence and this is likely to limit upside potential for the EUR going forward.”
“Even though political clouds are again gathering over the Eurozone, the ECB will still be under pressure to further reduce QE. That said, we expect the ECB will have to take particular care to prevent the market from anticipating that further tapering of the asset purchase programme has hawkish implications for short term interest rates. It is our view that the ECB will keep rates on hold at least until September 2019 and we would expect that any forthcoming announcement regarding a reduction of QE to be accompanied with dovish guidance on interest rate policy.”
“While we expect the ECB’s forward guidance on rates to subdue any hawkish message on QE tapering, the political backdrop in European should also give EUR bulls reason to think twice. Europhiles can breathe a sigh of relief that Italy’s new populism government may not be positioning itself on a strong anti-EMU platform.”
“The potential for clashes between the Italian government and Brussels has introduced a EUR specific element into the outlook EUR/USD in recent weeks. In our view this overlays a positive USD story that has been building since February. The draw of higher rates from the Federal Reserve and in particular is likely to continue favouring the USD. We see the current move higher in EUR/USD as a pullback after the recent sharp move lower. Medium-term we look for a move towards EUR/USD1.12.”
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