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The ECB convenes in around one week. Will the ECB announce QE? A lot depends on the exchange rate. The team at Credit Agricole discusses the “pain threshold”.

Here is their view, courtesy of eFXnews:

Credit Agricole CIB FX Strategy Research notes that after months of waiting we have reached what could be described as the final stretch of the EUR-rally before the all-important September ECB meeting.

“The single currency is testing new multi-year highs and, in doing so, the Governing Council’s appetite for further tightening in the Eurozone financial conditions. Indeed, the EUR-appreciation has been accompanied by persistent weakness of the Eurozone stock markets. More recently, both core and peripheral Eurozone yields have started climbing yet again adding to the persistent tightening in the Eurozone financial conditions.,” CACIB adds.

“In the coming days therefore, the key question for the FX markets will be what is Draghi’s EUR pain threshold.

We believe that, the sharp EUR-appreciation in recent months may have pushed the currency very close to if not above that threshold.

Indeed, the combination of persistent FX appreciation and oil price deflation, could pose significant downside risks to the Eurozone inflation outlook in the next 6M to 12M.

We therefore suspect that further EUR-gains in the near term could increase the risk of a very vague and noncommittal communication or even an outright delay of any QE-taper announcement on September 7,” CACIB argues.

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