- Expectations for tomorrow remain high, with most expecting QE to be cut in half
- Despite good Eurozone growth data, the ECB has been coy about turning hawkish
- Given the ECB's propensity to delay, this might not be the big moment speculators have been waiting for
Looking at the latest data on Bloomberg, the consensus expectation for tomorrow’s ECB announcement is that the Bank will extend its asset buying program by a further 9 months, while reducing the pace of its purchases by €30b per month. The current program allows the Bank to acquire €60b of government and corporate bonds a month, and terminates at the end of 2017. This is the big moment that euro speculators have been waiting for, and we have warned that long euros is a crowded trade with few long term catalysts many times in the past. Despite limited guidance from the ECB that would clearly suggest a 2018 taper and ongoing political tensions in Catalonia, euro speculators remain committed to their large long positions in the currency.
Downside risks more likely than upside
Based on the ECB’s rhetoric this year and comments expressing discomfort with the strength of the euro from ‘officials knowledgeable with the matter’ every time EUR/USD has approached 1.20, suggests that upside risks to the euro are limited. Given that the ECB is widely expected to reduce its pace of asset buying in 2018, the real issue is whether the Bank will choose to define a clear end date for the program. Our view is that this is unlikely, given that this would limit the ECB’s options in the future. Recent economic growth and survey data suggests optimism in the Eurozone, and provides a clear rationale for the ECB to turn hawkish. Yet, the Bank has clearly applied a dovish interpretation of the data in the past, and is likely to keep doing so. Even if the ECB reduces quantitative easing by a larger-than-expected amount, a lasting impact on the currency would be limited given elevated speculator positioning in the currency and high expectations.
Similar to previous ECB meetings, main interest will be in Draghi’s comments
Instead, a downside surprise is more likely in the form of comments from Draghi. At his last speech on October 12, Draghi made a commitment to keeping low rates “well past” the end of the ongoing asset buying program. He specifically stated that the statement regarding future rate hikes was “very, very important”. Given the specter of low inflation since Q1 2017, the ECB can point to disappointing inflation data as a reason to delay ending QE and returning to positive interest rates. Thus weak inflation may be the ace up Draghi’s sleeve. While our view is that global inflation rates are more likely to start rising from the fourth quarter of this year, this has yet to show up in the data available today.
Assuming Draghi pushes expectations of ending QE and raising interest rates further into the future (using the rationale of needing more time or data), our view is that this would negative for the euro. Markets have been waiting for the ECB to turn truly hawkish for a long time, and Draghi has been very adept at managing expectations by pushing changes further into the future. Despite strong growth data from the Eurozone, there’s no clear reason to believe why this will change tomorrow.