Welcome to our rolling coverage of today’s ECB Monetary Policy Meeting (12.45 GMT+1). Previews, live coverage and reaction below…
07.00 (GMT +1) ECB Review
Although the ECB Governing Council refrained from changes in its monetary policy today, the ensuing press conference had a decidedly Dovish slant to it, with President Draghi hinting at further policy measures in the near future.Actually, in his opening statement Draghi said that “Most notably, the strength and persistence of the factors that are currently slowing the return of inflation to levels below, but close to, 2% in the medium term require thorough analysis. In this context, the degree of monetary policy accommodation will need to be re-examined at our December monetary policy meeting, when the new Eurosystem staff macroeconomic projections will be available.”
Draghi has once again demonstrated his ability to bring forward the benefits of ECB activism resulting with EURUSD dropping two big figures from its level at the start of the press conference.
Although the Governing Council still expects that the economic recovery will continue and that inflation will likely be higher in 2016 and 2017, there are clear risks to the downside for both. Persistent weakness in emerging markets (China in particular) is seen as weighing on foreign demand and exports and Draghi also noted that “Increased uncertainty has recently manifested itself in financial market developments, which may have negative repercussions for euro area domestic demand.”In the Q&A session Draghi added that the inflation picture was even “less sanguine”as the Governing Council sees downside risks stemming from various factors:
- high output gap
- A possible further fall in oil prices [not in the ECB’s ‘technical assumptions’with this increasingly driven by demand rather than supply (another admission by Draghi)
- The appreciation of the nominal effective exchange rate the past several months.
- There has been a“high degree of correlation”between oil prices and inflation expectations, which could signal the risk of “de-anchoring”of expectations.
Interestingly the retail market flipped long as we moved lower yesterday suggesting that there is scope for further downside yet. I am not engaged currently and as a few key support levels I was considering have been blown through I prefer to wait for clearer opportunities
13.30 (GMT +1) Watch the Live Press Conference here
As ever there’ll be a press conference following the meeting of the Governing Council of the European Central Bank. This time they’re in Malta, and it’ll begin with a statement by Mario Draghi following by a Q & A. You’ll be able to watch the press conference live via this handy webcast:
13.20 (GMT +1) Join Our Traders For The ECB Press Conference
The ECB keeps all three reference rates as expected but the real action is still ahead with the ECB live press conference to come. Join our traders over in the trading room as they digest the release and share their views http://littlefishfx.com/live-trading-room/
12.40 (GMT +1) Bank Views On The ECB
Goldman Sachs – “EURUSD has asymmetric downside risk heading into this ECB, especially considering this is the lightest positioning we’ve seen all year. The reasons for the governing council to announce more easing are clear to us (EURUSD against 1.15, financial conditions tighter than when QE was announced, HICP negative/core soft, 5y5y breakeven inflation still too low, staff projections show they are missing their inflation target, German data slowing, and dovish rhetoric from the executive board and hawkish members Nowotny/Mersch). We expect Draghi to, at a minimum, speak with the same urgency as the September meeting while mentioning that more QE was discussed at this meeting, identify what would trigger that announcement, and that it could soon happen. Such dovish rhetoric should be good for a 1-1.25% move lower on the day. An extension of QE beyond September 2016 is probably worth 2% on the day, an increase in the monthly purchase amount is worth 2.5%, and a deposit rate cut with more QE is worth 3+%. It’s also important to keep in mind that a technical break of the September ECB low (1.10875) would open a floodgate of selling via existing order book stops and a short term market with little to no position. Should our dovish expectations prove incorrect, EURUSD will likely trade towards 1.18-1.20 into yearend as we struggle to identify the incremental seller/catalyst that would stop the squeeze”. Societe Generale – “The EUR has been in pre-ECB consolidation mode for most of the week so I suppose that its only appropriate that we should be seeing more of the same on the morning of the actual event. EURUSD is a touch lower challenging the 1.1320 region where we based out earlier in the week but we dont expect it to extend until the event. Saying that on the ECB we have some s/t selling interest into 1.1370-80 but bigger picture spot failed above 1.1500 late last week and we suspect that there will be supply into 1.1440 and then 1.1480-1.1500 again with stops likely above 1.1520-40. Meanwhile on the downside we think there will be continued buying interest into 1.1310-1.1280 region which is where the pair held on Monday but we hear that stops are building out below. There are large 1.1200 (2bn) large 1.1300 (+2.5bn) some 1.1350s (+600mln) and then 1.2bn of 1.14s in options expiries to get through this morning all of which could keep us pinned right after the ECB (assuming Draghi doesnt break us out of the range one way or another).”
12.10 (GMT +1) Bank Views On The ECB
Citi – “Our view is for ECB to remain on hold today but leave the door open for potential action in December, confirming risks still remain firmly to the downside and accept that the data has taken a turn for the worse. With this in mind the biggest and most painful shock to the market would be if they closed the door on December entirely through communicating a similar line to that of Mersch, Nowotny and Coeure that it is too early to consider extensions of the program. The key here is if December is still too early or only this meeting?”
UBS – “ECB to maintain a wait and see mode amid lack of clarity on external risks.We do not expect any material policy changes from the ECB’s meeting next week (Thursday 22 October). Although the ECB has turned a lot more dovish since its last meeting on 3 September, the case for more policy accommodation is not strong enough, in our view. A failure to add new stimulus might disappoint some market participants; this will make it all the more important for the ECB to carefully calibrate its message. We think Mr Draghi will reiterate that the ECB follows external developments carefully and stands ready to act, if needed. As such, he will leave the door open for more accommodation on 3 December, when the ECB will release new staff macroeconomic forecasts. We believe such a “wait and see” stance is sensible amid fragile market sentiment and uncertainty about external risks –although we do not expect more QE to be delivered in December either. Our base case scenario remains that the ECB will run QE in its current form (€60bn per month) until September 2016, followed by some form of tapering”
10.10 (GMT +1) A few trade ideas
A lack of further measures announced at this meeting is likely to see a squeeze higher in EUR though use of Dovish rhetoric, if deemed to signal December action, should temper the move providing better levels to sell.
Dovish ECB – Sell EURJPY
- EURJPY is coming into the end of its triangular range and a squeeze higher into resistance levels present a good opportunity to sell. There is a possible policy-divergence angle to this trade. With markets so heavily expectant that the BOJ will increase stimulus on October 30th, failure to do so would see JPY sharply higher against EUR with the possibility of December policy adjustment looming large.
- Fade the 138.50-139 resistance area, anticipating a false triangle breakout before a sharp reversal lower
Less Dovish ECB – Buy EURUSD
- If the ECB refrain from action and employ less Dovish rhetoric than expected market reaction could well be swift in EUR buying.
- Last week EURUSD breached the key 1.1460 resistance, if we get back above that level again this week look to use that level as a platform for buying against the USD. With the Fed likely to remain on hold this year this could prove to be a pivotal week for EURUSD and could setup a move higher into the year end targeting atleast a retest of 1.17 highs
9.50 (GMT +1) Expectations for the meeting
If we summarise the last ECB meeting as having seen no major policy adjustments, an acknowledgement of risks and plenty of Dovish rhetoric then it is highly likely that the October meeting will pass in a similar fashion. Make sure to look out for:
- References to inflationary outlook. Have the ECB’s inflation forecasts materially changed following the negative September CPI print? How do the ECB forecast the path of energy prices in the near term?
- References to China. How does the Bank regard China risks now?
- References to US lift-off. Does the Bank regard the recent weakening in US lift-off expectations as adding unwanted support for EUR?
- References to domestic data. How does the Bank regard current economic conditions?
9.30 (GMT +1) What’s happened since the last meeting?
Following the sharp sell-off on September 3rd, EURUSD has remained range-bound against JPY, GBP & USD whilst weakening against commodity currencies. Data since the last meeting has painted a deteriorating picture in the EuroZone with very limited positive data
- September CPI showed a dip into deflationary territory printing -0.1%
- September trade balance narrowed to 15.3bln from 25bln previous
- EuroZone unemployment remained at 11% whilst expected to have declined to 10.9%
- EuroZone manufacturing and services PMIs both fell short of expectations
- Consumer Confidence was down in September also
- EuroZone GDP increased to 1.5% from 1.2% headlining the positive data releases.
9.10 (GMT +1) Welcome to our day’s rolling coverage
Hello and welcome to our live coverage of today’s ECB Meeting. Here are the key details for the day:
- European Central Bank October Meeting
- Thursday October 22nd, 1245GMT1
- Current rate 0.05%, expected unchanged