ECB Meeting: Two reasons to be dovish

The European Central Bank is having its monthly economic meeting next Thursday, September 3rd, and no changes to the ongoing economic policy is generally expected. Nevertheless, there are two main issues, the ECB will have to deal with, if not in this, over the upcoming meeting:

• A weakening outlook for global growth

• Subdued local inflation

Watch the ECB Meeting Live Coverage by Valeria Bednarik and Dale Pinkert

Chinese turmoil is spreading like fire, and is not just about falling stocks. The economy has not decelerated  but is actually contracting according to the latest Caixin Manufacturing figures, down to 47.3 the lowest reading since March 2009, the second month in-a-row below the 50 level. Commodities demand shrunk, energy prices came under strong pressure, and inflation in the EU held steady in August at 0.2%, according to the latest flash estimate from Eurostat, well below the 2.0% target. 

The ECB is currently buying €60bn a month, mostly in government bonds and is scheduled to keep up these monthly purchases until September 2016, although it has emphasize multiple times the program is open-ended. Given the ongoing situation, there is a good chance Mario Draghi will present a more dovish stance during this meeting, and even express the willingness to use other available instruments if needed.

During the July meeting, the ECB acknowledged worldwide developments, but at that time policy makers believed that they  "have not changed the Governing Council’s assessment of a broadening of the euro area’s economic recovery and a gradual increase in inflation rates over the coming years, " according to the Central Bank statement.  

Since the crisis has deepened, resulting in a stronger EUR, the ECB is going to have a hard time to maintain its wording. Additionally, the Central Bank may have to revise down its economic projections, particularly those referring inflation. 

Overall, a dovish stance is expected to weigh on the common currency, although with the US Nonfarm Payroll release 24 hours later, the movements will likely remain restricted, as investors will be looking there for clues on the upcoming FED's economic policy meeting, before jumping into a certain trend.