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2 Oct 2013
Flash: What’s the sentiment around the ECB today?
FXstreet.com (Edinburgh) -The ECB is holding its monthly monetary policy meeting today. According to market consensus, the current context of monetary tightening reflected in higher levels of the EUR/USD would represent a challenge for the monetary authorities. One thing seems to be certain amongst traders however: the dovish tone from President Mario Draghi would surely weigh on the pair, although the extent of its effects remains not clear amidst the prevailing skepticism regarding the sustainability of the bank’s forward guidance. Apart from that, the lending benchmark is expected to remain on hold at 0.5%, at least in the very near-term.
“This lack of reaction has stemmed from the fact that the markets have not expected the ECB to follow through with any new policy initiatives recently. Insofar, as another LTRO is currently suspected by the market as a real policy option for the ECB next year, dovish Draghi rhetoric may have a little more firepower going forward”, observes Jane Foley, Strategist at Rabobank.
A dovish tone from Draghi’s press conference would be a done deal for analysts at BTMU alongside another refi rate cut before year-end. “October is probably too early though, but Draghi will no doubt try and keep those expectations alive with a dovish press conference”
The likeliness of the ECB to implement to another LTRO remains alive, although market participants have already expressed their doubts regarding its effectiveness. In the opinion of Greg Gibbs, Strategist at RBS, “It is possible that they announce an extension of its ample liquidity regime for another year until at least mid-2015 as part of an effort to keep down longer term money market rates… However, our European Economics team expects the ECB’s easing bias to be de-emphasised and dropped in coming months as confidence in a recovery increases”. Following the same line, Frank Hansen at Danske Bank, commented, “We expect the ECB to provide further easing, probably in the form of a new 3Y LTRO, when excess liquidity has declined so much that it pushes short market rates notably higher. We think this could happen late this year or early next year… There is a risk that investors will be disappointed if Draghi’s wording fails to be really dovish and then rates could go higher, yield curves flatten and EUR/USD could strengthen”.
According to Shaun Osborne and Greg Moore, Strategists at TD Securities. “No new policy initiatives are expected, however—the “external” location of the meeting means that significant announcements are unlikely—but the door for more policy accommodation is likely to be left open”.
All in all, amongst the likeliness of more non-standard measures, further easing bias and even the likelihood of deflationary pressures, the prevailing tone from today’s ECB gathering would be tilted to the dovish side. An initial knee-jerk below the 1.3500 handle is most likely although the net result from the meeting could leave the pair unchanged or even higher if no major announcements are made or more structural measures are brought forward. And of course, there is room for disappointment, which in that case the pair would see further buying interest with Tuesday’s peaks around 1.3590 as the immediate target. Strategist Sean Callow at Westpac also noted “With EUR/USD near highs dating to February, euro strength could be another topic. Risks look to be tilted lower for the euro around the press conference”.
“This lack of reaction has stemmed from the fact that the markets have not expected the ECB to follow through with any new policy initiatives recently. Insofar, as another LTRO is currently suspected by the market as a real policy option for the ECB next year, dovish Draghi rhetoric may have a little more firepower going forward”, observes Jane Foley, Strategist at Rabobank.
A dovish tone from Draghi’s press conference would be a done deal for analysts at BTMU alongside another refi rate cut before year-end. “October is probably too early though, but Draghi will no doubt try and keep those expectations alive with a dovish press conference”
The likeliness of the ECB to implement to another LTRO remains alive, although market participants have already expressed their doubts regarding its effectiveness. In the opinion of Greg Gibbs, Strategist at RBS, “It is possible that they announce an extension of its ample liquidity regime for another year until at least mid-2015 as part of an effort to keep down longer term money market rates… However, our European Economics team expects the ECB’s easing bias to be de-emphasised and dropped in coming months as confidence in a recovery increases”. Following the same line, Frank Hansen at Danske Bank, commented, “We expect the ECB to provide further easing, probably in the form of a new 3Y LTRO, when excess liquidity has declined so much that it pushes short market rates notably higher. We think this could happen late this year or early next year… There is a risk that investors will be disappointed if Draghi’s wording fails to be really dovish and then rates could go higher, yield curves flatten and EUR/USD could strengthen”.
According to Shaun Osborne and Greg Moore, Strategists at TD Securities. “No new policy initiatives are expected, however—the “external” location of the meeting means that significant announcements are unlikely—but the door for more policy accommodation is likely to be left open”.
All in all, amongst the likeliness of more non-standard measures, further easing bias and even the likelihood of deflationary pressures, the prevailing tone from today’s ECB gathering would be tilted to the dovish side. An initial knee-jerk below the 1.3500 handle is most likely although the net result from the meeting could leave the pair unchanged or even higher if no major announcements are made or more structural measures are brought forward. And of course, there is room for disappointment, which in that case the pair would see further buying interest with Tuesday’s peaks around 1.3590 as the immediate target. Strategist Sean Callow at Westpac also noted “With EUR/USD near highs dating to February, euro strength could be another topic. Risks look to be tilted lower for the euro around the press conference”.