The June ECB decision will see Draghi having to balance growth downgrades, headline inflation upgrades, peripheral tensions, and setting expectations for eventually winding down QE, according to analysts at TDS.
Key Quotes
“Draghi will need to strike a delicate tone in still expressing enough confidence in the recovery to justify an eventual end to QE, while acknowledging growing downside risks to the outlook.”
“We believe that the ECB will delay the decision on QE post-September to the July meeting, much like the ECB did last year in discussing various scenarios in September, but not announcing its final decision on QE until October. There are several good reasons why it makes more sense to delay the decision for another few weeks.”
“Rates Strategy: From a tactical perspective and after the recent sell-off, we still prefer being mildly long fixed income for the June meeting. While the end of ECB’s QE programme cannot be avoided. For us, the bigger picture issue is how the ECB’s monetary tools are sequenced. From a medium-term perspective, we continue to recommend positioning for the end of QE. We like expressing our view via 5s30s Bund steepeners as well as short 10y Bund real yields.”
“FX Strategy: With next week’s Fed and ECB decisions only hours apart, we think EURUSD may settle into a range around current levels (1.1825). An early QE conclusion could see a sharp EUR rally, but a delay to July could ultimately see a larger – albeit slower – grind higher over the next several weeks. We continue to see upside risks to EUR this year despite its recent correction. Downside risks have emerged to our 1.27 Q4 forecast, but these still seem modest for now as the shifting landscape of global capital flows still favors EUR appreciation over the medium term.”
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