ECB Preview: Dovish Draghi set to dampen tiny tightening, EUR/USD bears are waiting

• The ECB is set to provide fresh forecasts ahead of the planned QE tapering.
• The recent slide in inflation implies a dovish tone from President Draghi.
• The EUR/USD may see choppy trading due to many moving parts in the presser and beyond.

The European Central Bank will deliver its rate decision on Thursday, September 13th, at 11:45 GMT. ECB President Mario Draghi will begin his press conference at 12:30 GMT and will be on stage for about one hour.

Implementing QE tapering with a dovish twist

The Frankfurt-based institution is not expected to announce any policy changes. It has already laid out its moves back in June and recent developments have not been sufficient to alter the course. Beginning in October, they will reduce the monthly buying of bonds from €30 to €15 billion. The reduced pace is set to run until the end of the year and from 2019, the ECB will not buy any more bonds. The Quantitative Easing program, announced in January 2015 and implemented from March that year, is reaching its end.

Back in June, the Bank added conditions to the gradual withdrawal from the accommodative monetary policy. It depends on rising inflation and on the outlooks evolving as expected. The ECB also pledged to keep interest rates unchanged through the end of summer 2019. Draghi clarified in July that this means September next year rather than earlier, as some translations had suggested. That was the dovish twist that resulted in the downfall of the EUR/USD.

This time, the ECB convenes just ahead of the implementation of the tapering, and like with the announcement of the move, it may add a dovish twist. Draghi is a known dove that hurt the common currency on many occasions. It will not be hard for him this time around. 

He will likely stress the conditionality of the next moves and will remind everybody that a rate hike is due at least one year from now. If he emphasizes that the ECB may wait with rate hikes to a later date, it could weigh on the Euro.

And the data also support the dovish side.

Inflation not going anywhere fast and neither is growth

The preliminary CPI read for August disappointed with a read of 2% on headline inflation. This is bang on the ECB's target but below previous levels and not showing any acceleration. Moreover, Core CPI also dropped, to 1%. The discrepancy is a result of the energy prices. The advance of oil prices earlier in the year continues pushing headline inflation higher. Core inflation is not going anywhere fast due to a slowdown in growth and a still high unemployment rate.

Draghi and his colleagues were encouraged by signs of rising wages, but are unconcerned by salaries pushing inflation dangerously to the upside. 

The ECB staff will publish fresh forecasts for inflation and growth. These are not expected to stray away from the outlook published back in June. Inflation is not going anywhere fast and growth rates of 0.4% QoQ seen both in Q1 and Q2 are more or less what the Bank had expected. 

Draghi will present the updated macroeconomic forecasts for this year and the next two years early on in his press conference. In case all the projections are downgraded, it could hurt the Euro. In case they are all upgraded, it could send the common currency higher. As mentioned earlier, no significant changes are on the cards.

Other moving parts

In an hour-long press conference, Draghi will be asked about quite a few topics. There were reports that the Italian government wants the ECB to continue buying its bonds. Draghi, an Italian, will likely dodge any such politically-sensitive questions. Another issue is Brexit and its impact on the euro-zone, and a third one is Turkey.

The Turkish central bank holds its rate decision at 11:00 GMT, just before the ECB does. The country at the border of the euro-zone is set to raise rates after refusing to do so for a long time. The crisis in Turkey caused some concerns as several euro-zone banks are exposed to the country. Draghi will likely dismiss the issue, but he may always opt to express concerns, adding another dovish factor.

Apart from the Turkish rate decision, another external factor moving the EUR/USD at the same time comes from US inflation figures. These are released at 12:30 and a substantial surprise can temporarily steal the show from Draghi. Nevertheless, the ECB decision is the primary event for the world's most popular currency pair at that moment. 

A topic that is unlikely to arise now but will be of increasing importance is Draghi's successor. The President ends his eight-year term in November 2019 and the battle to succeed him is beginning to take shape. It will be surprising if Draghi doesn't dodge the topic.

Conclusion

The ECB is not expected to make any big announcements on the eve of its already announced QE tapering. The message coming from Draghi and the new forecasts will likely be cautious or outright dovish, pushing the EUR/USD lower. An upbeat message has a lower probability. Inflation recently slowed down and growth is not going anywhere fast. The Turkish rate decision and US inflation can cause some distractions.

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