The European Central Bank does not like the strength of the euro. We know that already from the previous rate decision. President Mario Draghi tried to sound dovish but failed to convince markets.
It does not mean that they are giving up. Further “sources,” say that the highly-anticipated decision about QE tapering could wait until December. These are the last days of the Autumn, so technically that would be within the timeframe that they set from the outset. Nevertheless, it would be a setback from expectations to make an announcement in September.
Further “people with familiar with the matter,” said that the ECB is not pleased with the stress of the euro. These reports by Reuters and Bloomberg have kept the euro somewhat depressed. EUR/USD was unable to take full advantage of the mediocre US jobs report.
Low expectations, upside risk
So, expectations are low now: the ECB is not expected to make any announcement now, just to tell us that it will make a decision later on. They may adopt a phrase from the FED: “in an upcoming meeting”. The ECB walks in the footsteps of the Federal Reserve more than once.
With low expectations, there is room for the upside. This is always the case in trading.
And there are reasons to believe it may be the case now:
- Inflation: CPI rose by 1.5% y/y, better than expected and core CPI remained stable at 1.2%. While inflation is not steaming hot, it is not low enough to justify massive printing of money.
- GDP: Growth continues to shine in the euro-zone. The 19-country bloc grew by 0.6% in both Q1 and Q2.
- Nowtny et all: Various ECB members, including the Ewald Nowotny, the Austrian central banker, did not seem to be too worried about the strength of the euro.
Conclusion
The ECB may refrain from making a decision right now. Nevertheless, Draghi may do his best to make dovish sounds, but markets will find it hard to believe.
And what about the euro? The reporters will surely ask about it, and Draghi is unlikely to provide any juicy answers. The usual phrase is “we do not target the exchange rate”. That may be disappointing for euro bears.
All in all, the euro has room to rise on the ECB meeting.
More: September ECB Meeting Preview – Will the ECB officially signal tapering this month?
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