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ECB Preview: Draghi to re-open door for additional rate cuts - Danske

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Apr 18, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    According to analysts from Danske Bank, Draghi will sound dovish and will re-open the doors for more rate cuts.

    Key Quotes:

    “We expect a dovish tone from Draghi at the ECB meeting this week, but no new measures. Despite the comprehensive package of easing, which was announced in March, the ECB is still under pressure to ease again as inflation expectations remain around a historically low level, while the effective euro has strengthened following the easing from the ECB.”

    “We believe Draghi will re-open the door for additional rate cuts after stating at the latest meeting in March that he did not anticipate more rate cuts. Draghi is likely to do this by emphasising the ECB’s forward guidance stating that policy rates are expected to ‘remain at present or lower levels for an extended period of time’.

    “A renewed focus on cutting policy rates should not be a big market surprise, as the ECB minutes revealed that ‘the Governing Council would not rule out future cuts in policy rates, as new shocks could change the outlook for inflation’. Generally, market expectations ahead of this ECB meeting are not very high, but looking further ahead additional rate cuts are priced in with a probability around 50% in September.”

    “ On the FX side, soft words from Draghi support our view that the ECB may see some temporary relief from a weaker EUR/USD. Much less stretched short positioning in the cross leaves room for relative rates to play a role in the cross again in 1-3M and we see potential for ECB-Fed divergence to see a short-lived return.

    “In a longer term perspective, we expect the ECB to extend the QE purchases beyond March 2017. This should follow as inflation in our view will not pick-up sufficiently for the ECB to remain on hold. We do not expect additional rate cuts, but a strong appreciation of the effective euro could force the ECB to cut again.”

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