ECB Preview: Two camps, both with stronger arguments – Danske Bank

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Jan 21, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Delhi) – Research Team at Danske Bank, expects Mario Draghi to express a patient view at the ECB meeting on Thursday, as he needs to balance the views of the doves as well as the hawks, who have all received information strengthening their respective cases for the need for more or no more easing.

    Key Quotes

    “The very low oil price is a threat to our expectation that the ECB has delivered the end of easing but, in our view, the December meeting showed that the bar for additional and aggressive easing is higher, and more easing would require 1) an unwarranted tightening of monetary policy stance, 2) a worsening of the medium-term outlook for inflation and/or 3) a weakening of the domestic growth outlook.

    The minutes from the ECB meeting in December revealed that should the ECB ease again, a deposit rate cut may be preferred by a broader group within the Governing Council, but a deposit rate cut at the meeting in March is already priced in with around a 50% probability and, in our view, this is too aggressive.

    Given that the market already prices in a relatively high probability of additional rate cuts, the meeting on Thursday could be a disappointment if Draghi does not point to further rate cuts. That said, we expect Draghi to continue to express a somewhat worried tone regarding especially the inflation outlook, implying markets are likely to continue to anticipate more easing from the ECB for some time.

    If we are right that the ECB will disappoint this week by not being willing to signal the need for another deposit rate cut, EUR crosses should see some support post the meeting. We look for a test of 1.10 in EUR/USD on the back of the ECB meeting this week. We still expect the cross to edge back into the 1.05- 1.10 range near term followed by a rebound to 1.16 in 12M.”
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