What To Expect From ECB Meeting? - Views From 15 Major Banks

The following are the expectations for today's ECB meeting as provided by the economists at 15 major banks along with some thoughts on the EUR into the event as provided by the FX strategists at these banks.

Morgan Stanley: It will take a decisive signal from the ECB to prevent EUR from increasing over the next few months, in our view. A roadmap setting out conditions under which the ECB would increase the size of the QE operation would help to prevent EUR from rising, but should the ECB provide little guidance regarding when and if it may consider enhancing its easing operations then EUR will likely move higher, driven by commercial buying needs exceeding financial outflows within a world of higher asset volatility and little investment opportunity.

SocGen: We expect the ECB meeting to be a low-key event with no change in policy and only minor adjustments to the staff projections. President Draghi is likely to maintain a dovish tone while signalling that the ECB is ready to act further if needed.

BofA Merrill: Avoiding more euro re-appreciation is the short run priority for the ECB. In our view “talking dovish”, i.e. unambiguously recognizing the risks to their outlook and underlining the possibility to do more, should be the ECB’s first port of call for this week, while the resilience in the real economy data flow and uncertainty over the Fed stance makes it hard to get into action in September already, beyond possibly some minor tweaks to asset eligibility as a sign of goodwill. In the medium run though, we believe the negative risk to consumer prices from the Chinarelated turmoil matters more than the adverse shock on growth. Talking the currency down” by insisting on the possibility to do more rather than big, hard to reverse decisions, should be the natural slope.

Credit Suisse: The ECB Staff macroeconomic projections are highly likely to show a downward revision in headline HICP inflation both this year and the next, from 0.3% nearer to 0% and from 1.5% nearer to 1%. The ECB will also be forced to revise 2017 marginally down from 1.8% to 1.7%. This increases the likelihood that QE is pursued beyond September 2016, but President Draghi is unlikely to make any firm commitment toward extending QE beyond that date, for the time being. EURUSD continues to trade as a funding currency, rallying on risk off and selling off in times of rising risk appetite. We don’t see potential for this to change in the near term, unless the ECB press conference brings forth some dovish developments. With inflation breakevens falling, we think this is a possibility.

BNPP: We expect the ECB to stop short of providing additional easing at today’s meeting, although the tone should turn more dovish, reflecting adverse global developments that will make it more difficult for the ECB to achieve its inflation target. In particular, financial conditions have tightened since the July meeting via a further 4% appreciation of the trade-weighted EUR exchange rate and inflation expectations have fallen, reversing all the gains since the start of the QE programme in January. We think further monetary loosening (likely in December) and a rebound in inflation expectations would be key to jump starting eurozone capital outflows and EUR weakness. We continue to position for gradual unwind of EURUSD and EURGBP gains via bearish options structures.

Credit Agricole: We expect the ECB meeting to keep the single currency under pressure. Our preferred long remains the USD going into the NFP release on Friday where we expect more solid payroll gains and stable unemployment. Short-EUR/GBP is starting to look increasingly attractive as well. To the extent that renewed dovishness by the ECB helps prop up market risk sentiment, we could see some renewed interest in EUR-funded carry trades in the wake of the meeting. With concerns about China still unabated and a Fed lift-off not far away, however, we doubt that a trend reversal lower in the EUR-crosses is on the cards.

Citi: Bottom Line: A dovish Draghi is consensus, but it is likely too early to see a follow through. Most economists expect forecasts to be lowered (especially inflation) and a dovish press conference, but in terms of new commitment or action, we suspect the market will be left short. Directionally, this implies EUR will be sold over the statement/press conference, but with no significant adjustment to policy and NFP the following day, a commitment from traders should not be large. We expect EUR will probably be sold on the ECB forecasts/press conference, but bought back after. This leaves EURUSD still range bound between 1.08-1.17.

LIoyds: The ECB will release new staff macroeconomic forecasts which are expected to revise lower its CPI inflation projections through 2017, largely as a result of lower oil price assumptions, reflecting in part the economic slowdown in China. As a result, ECB President Draghi’s comments at the press conference today are expected to be dovish, emphasising that the Governing Council stands ready to expand the policy stimulus should domestic economic conditions deteriorate. Latest eurozone economic data, however, have remained relatively positive and core inflation has continued to creep higher. As a result, and notwithstanding the expected dovish rhetoric, we believe policy will not be altered at today’s meeting.

RBS: We expect a more dovish tone today, but no giant steps toward a QE extension and eventual acceleration. We see two focal points: (1) The treatment of the ‘unwarranted tightening’ via higher real yields and (2) ECB staff inflation forecasts. We expect heightened alert on ‘unwarranted tightening’ in the Q&A but nothing more at this stage. The staff forecasts may be revised down by 0.1pp for both 2016 and 2017, small changes, and they will likely remain at the higher end of international forecasts. We think the risks are on the downside given tougher conditioning assumptions (oil, EUR, global demand), whilst Mr Constâncio’s remarks at Jackson Hole leave room to question the ECB's hawkish output gap assumption.

UBS: With inflation expected to remain, well below ECB's target of "close to, but below 2%", we think the ECB will have to keep its monetary policy very accommodative for the foreseeable future. Our base case is that the ECB will run QE in its current form (€60bn monthly) until September 2016, followed by some form of tapering.

Barclays: We expect the ECB to ease monetary policy further before year-end as a result of what we consider to be an unwarranted tightening of financial conditions. At today’s press conference, we expect ECB President Mario Draghi to prepare markets for such a decision and we think he could even announce an extension of the programme beyond September 2016. Other options including an extension of the scope and the size of the programme are likely to be discussed, and even possibly another cut in the rate of the deposit facility, although unlikely to be agreed upon today.

Deutsche Bank: We expect the ECB to respond to recent events with verbal intervention. Our new market-based Financial Condition Index (FCI) has tightened sharply in the last couple of weeks. But the ECB sees gradual spillovers from its accommodative policy stance into bank credit counterbalancing tighter financial market conditions. Euro area GDP growth expectations remain largely static, with lower oil prices and easy credit conditions offsetting a stronger euro and slower global growth. This facilitates a “steady hand” on policy. However, we expect the ECB staff inflation forecast for 2017 to be revised marginally lower. Although we believe that fears of a hard landing in China are overdone, capital outflows could put upward pressure on the euro or — through falling FX reserves — on long-term government.

Commerzbank: ECB President Mario Draghi is likely to sound concerned about recent developments on the markets. For the FX market any comments on the EUR exchange rate are of particular significance. After all the single currency appreciated by roughly 6% against USD since March. Is that sufficient to constitute a reason for concern?...So from that point of view there is a risk that Draghi, similar to last year, will refer to the exchange rate and the negative effects of a stronger appreciation to prevent further EUR appreciation. If he refrains from doing so the FX market is likely to see this as an invitation to seeking the EUR even more as a safe haven under the next wave of risk aversion (e.g. due to renewed turbulence on the Chinese financial markets).

SEB: We expect the ECB to maintain its current monetary stance, repeating its intention to continue the QE program until end-September 2016 or longer if needed. The ECB is also likely to stick to its prediction that the ongoing moderate recovery will continue, possibly with increased downside risks. We foresee a cut to the ECB’s inflation projection to indicate that it will take until 2018 to see the HICP inflation moving closer to 2%.

Danske: At the ECB meeting the question is in our view how dovish Draghi will be following the latest drop in 5Y5Y inflation expectations. Already in the introductory statement we expect him to emphasise the open-endedness of the QE programme and include that the ECB is ready to use all instruments if needed.

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