Here’s what to look for from the ECB
Today marks the end of the ECB’s QE program, sort of. By the end of this month they would have racked up nearly $3tn in government and corporate assets.
Has it been a success? That’s a very open question but one we don’t need to get into for the purpose of today.
What counts today is what the ECB does moving forward, and already they’ve been sending out the “sources” pigeons to ease market expectations, something that’s been prevalent ahead of most ECB meetings where there’s been suspected action.
Over the last few weeks we’ve had various titbits and hints dropped into our laps as to what the ECB will do with re-investing and withdrawing QE, what other tools they might bring back to the fore to aid economic growth and any forecast changes.
Today’s meeting is going to be all about next year. QE purchases may be ending but it will still be sloshing around the system for a long while yet.
What to look for in the meeting
- Confirmation of the end of asset buying – This will probably come with a heap of self-praise on how wonderful it all was and how it saved the Eurozone. More importantly, look for Draghi to ease the ending by pumping that the ECB will remain very accommodative after
- Reinvestment of QE – Again, this falls into the “accommodation” rhetoric. This is likely to be a hot topic for the press so expect plenty of questions on it. The ECB will want to make sure that they’re clear reinvestment will run as long as needed
- Withdrawing QE – Possibly more important than the reinvestment talk. The ECB will want to paint a smooth path for withdrawing stimulus. They’ll pump the slow and steady route but anything that indicates a sharper withdrawal will be bullish for the euro. This subject is important in the interim but will fade in importance as time passes, just like it did with the Fed
- Other tools in the tool shed – Some focus will be on the economy and how the staff projections might have been changed. This morning we’ve heard that growth and inflation might be marked down slightly. Again, these hints are usually often more right than wrong. As the ECB won’t have QE anymore (They’ll still say it’s a tool they can use) they’ll look to remind us of the other programs they can use, such as the TLTRO’s. They may even have something new for us as a surprise. It’s likely to be these tools they will turn to, to manage the economy from now on as they can’t just switch QE on and off like a light switch. QE is the big guns, TLRTO’s etc are the small guns
- Rate hikes – They key subject among them all. QE reinvestment, stimulus withdrawal, is all piecemeal compared to rate talk. The ECB has vague rhetoric of “through the summer of 2019 for possible hikes” but it’s open and non-committal. Expect that rhetoric to remain. Expect the ECB to be pushed on it but Draghi will likely remain steadfast in his message
One thing we do know is that Draghi will want to keep expectations under control. The market will be itching for something hawkish, particularly on rates. Only if we get something more solid on rate hikes are, we likely to see the euro rise or fall, depending on what it is. If Draghi maintains the passed summer for hikes line, that might keep EUR mildly supported as it will maintain the ECB’s view that the softer data these last months is temporary. Anything stronger and we’ll jump.
Trading wise, for EURUSD, I’m still in the 1.1200-1.150 camp for places I’d prefer to trade. We’re pretty much in a sweet spot at 1.1370 to possibly see either of those edges come into play if there’s big news.
I still favour shorting a rally in EURUSD to run into the Fed next week, so that’s what I’ll be watching for. As ever, I’m not married to any levels or trades as I’ll have to decipher the headlines like everyone else.
This is a potentially big ECB meeting but don’t overlook the fact that Draghi loves to deflate expectations and volatility as much as possible.
Good luck if you’re trading it.