ECB Meeting Preview: Easing package on its way


This week's main event is Thursday's European Central Bank meeting, where it is expected to change its forward guidance and pre-announce a rate cut and potentially a package of new easing measures to be unveiled in September.

If we recall the previous meeting in June, the ECB ‘eased’ its guidance to keep rates at current low levels at least through the first half of 2020. They also said they were “ready to act” if “adverse contingencies” materialised. However, the lack of clear signals that easing was coming disappointed many analysts.

Two weeks later at the ECB Forum in at Sintra, President Draghi moved the dovish dial further by stating that in “the absence of improvement, such that the sustained return of inflation to our aim is threatened, additional stimulus will be required.” This further easing would therefore occur at some point in the near future, meaning the bar to not now acting was very high. 

Since then, economic data has continued to paint a rather subdued picture, even allowing for this week's better than expected consumer confidence figure. Core inflation has also improved to 1.1% from 0.8%
but the global uncertainties plaguing the outlook are still unresolved. Fears particularly centre on a weak manufacturing sector which may spill over to still decent domestic demand.

So, Thursday's meeting is likely to set the scene for a cut in the deposit rate at the September meeting. The ECB are also likely to reiterate that they are willing and able to restart the asset purchase program and move to a tiered deposit rate.

There are some in the market who think Draghi may surprise the market by acting now. This is because it would likely mitigate euro appreciation in the event of the likely Fed cut at the end of the month. Also, there is an extended gap between now and the next ECB meeting. However, we think action will be timed with the release of the next round of ECB forecasts scheduled for the September meeting. 

Here are the numbers to know ahead of the statement at 11.45 GMT and President Draghi’s press conference at 12.30 GMT:

FX Outlook

EUR/USD has continued to trade in a tight range this month, with 1.12 acting as solid support. Yesterday's very tight range of 21 pips (between 1.1204 and 1.1225) was an 'inside day' and the smallest 1-day range since April 2014.

Price action like this generally sees range expansion soon after and the euro has fallen sharply today as expectations for a rate cut at Thursday's meeting reach fever pitch. Rising trend support around 1.1210 from the May low has been broken and now acts as resistance.

Medium-term trend signals are flat which means the 1.1160/1.1300 range is likely to contain prices in EUR/USD, at least for several more days. That is unless, Mario does surprise us...

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