Draghi is delivering a duplicate of Fed - HSBC

Analysts at HSBC suggest that the ECB is repeating what the Fed did during 2014, the EUR is repeating the movements of the USD.

Key Quotes

“The shift in language from ECB President Draghi over the past few months has been modest. Actually, when one thinks about how little tangible change has been delivered so far, the strength of the EUR has been remarkable. He has not talked about raising rates.  The ECB balance sheet is still getting bigger. But Draghi has offered enough to nudge the market’s perception of future policy towards a debate about the exit strategy. The market conversation about the ECB is not about future easing, it is about QE tapering, possible hawkish forward guidance shifts, and abandoning negative interest rates. The EUR is thinking about the exit now.”

“So as with the Fed and the USD in 2014, the EUR is the test bed of tightening. It does not feel like the ECB wants to tighten “officially” any time soon. Our own economics team believes it will leave rates untouched until the end of 2018. But there is no need to move. The EUR is rallying and if the economy wilts under the pressure, the EUR would reverse lower. Again, this would likely be plain sailing rather than a perfect storm.” 

“Think also about the manner in which the financial market is listening to Draghi. He is unlikely to offer anything dramatic in terms of signals on interest rates or the pace of QE outside of his formal press conference at ECB policy setting meetings. However, there is always scope for something to be said about the EUR if the central bank fears it may have moved too far or too fast. In other words, the currency is a timely tool and can easily and frequently be re-cast with a comment here or there. The central bank seems to be in command of the currency.” 

“When viewed as first-mover policy tools, currencies become more understandable, and their likely path a little less obscure. When, back in April, we forecast EUR-USD to finish 2017 at 1.20 spot was trading at 1.07. Our forecast was the most bullish EUR among the major forecasters, reflecting our view that the conversations about policy in the US and Europe were about to move in opposite directions. The USD had some easing to deliver, the EUR could be allowed to deliver some modest tightening.”

“But we would not recommend chasing the EUR rally further. Our forecast for year-end remains stubbornly at 1.20 even as the consensus drags its forecasts higher, with some now more bullish than us on the EUR. Our forecast for 2018 also remains at 1.20. We faced a similar but opposite dilemma in 2015 when EUR-USD had been falling, reaching our target of 1.05. Rather than revise lower as the consensus was at the time, we kept it steady, then revised higher and watched the forecasts drop. Spot, however, settled into a sideways 1.05-1.15 track. We now think the scrambling consensus is about to make the same mistake but to the topside.”

“The ECB will want to see how its exit strategy plays out. In the same way as the USD slipped into a holding pattern in 2015, we expect the EUR to do the same in 2018. Gradual tapering and language bringing the first rate hike a little closer are likely in the coming months, but this is what the FX market is already anticipating. In the end, Eurozone inflation remains low enough and underlying price pressures sufficiently benign not to prompt a big change in the ECB’s stance. So we stick with a flat profile for EUR-USD through 2018. Sometimes the “news” is that a currency is not going somewhere.”

“But there is still plenty of scope for movement in other currency pairs.”