ECB is expected to modify its language - BBH

The research team at BBH suggests that ECB is expected to modify its language on the outlook for interest rates and its risk assessment.

Key Quotes

“The ECB has told investors that interest rates will remain at present or lower levels if needed.  It can drop the downside bias.  The market has effectively done this already. The ECB would be validating what the market has done.  The ECB has indicated that downside risks have diminished, and the ones that exist stem from exogenous factors (maybe Brexit, US trade policy, China's economy).  It could say the risks are balanced, and it would be a small incremental change.”

“In fact, such expectations seem so widespread that if the ECB do not make these changes, it may be seen as dovish, even though making these minor changes are not exactly hawkish.  Draghi has indicated that it is premature to talk about the exit strategy, and this applied to the negative deposit rate as much as the asset purchases.  The earliest the ECB will announce its intentions for next year is September.  The ECB is expected to buy 30-40 bln euros of assets in the first part of next year, down from 60 bln currently and 80 bln most of the last year and through Q1 17.”

“The ECB's staff will update its forecasts.  Growth forecasts may be revised a little higher. What would reinforce Draghi's message that inflation is not yet on a sustained path toward the target despite the recent elevated readings would be driven home if the staff trimmed this year and/or next year's inflation forecast.  Medium-term averages of the euro have risen around 5% since its March forecasts, and a medium-term average of the Brent has fallen by about 5%.”

“Buy the rumor, sell the fact type of activity could be seen in response to the ECB, but sentiment toward the euro may not change unless the US rate premium grows.  The euro finished last week on its highs of the year, within striking distance of $1.13, last seen in the early response to the US election last November.  A potential trendline is drawn off the August 2015 high (~$1.1715), and May 2016 is found near $1.1450 by the end of June.  (~$1.1615).”