It’s universally expected the ECB will make no change in policy or communication today. The weaker incoming data has provided plenty of cover for ECB member to talk down “normalization” even introduce speculation that an increase to the current €30billion asset purchase program is actually on the table. The subdued inflation trajectory is unlikely to improve by June due to stronger Euro and slower growth momentum. However, real consideration of another QE extension we suspect is a smoke screen. First of all the current slowdown is global and generally considered transitory in nature. French and German flash PMI have already indicated a pick-up. Second is the fact the overall conditions in Europe have broadly improved.
The transition from economic recovery to expansion continue with GDP growth expected estimated around 2.2% for the Euro area. Hardly data that requires extremely policy action which include negative interest rate and extended asset purchases. As with the Fed in 2014 a significant factor tightening was the desire to get policy off the bottom just in case an economic situations demanded real action. Central banks need policy tool free and available and right now, the ECB is completely tied up. There was also fear that the Fed was not actually generating inflation, and driving the real economy but merely encouraging risk taking. As of these discussion are being had inside the ECB. In addition Riksbank decisions to keep policy unchanged and keep dovish bias given the broader macro backdrop serves to only highlight the disconnect between action and results.
Despite the ECB effort to create the appearance of two way action there is only one way the policy can go. Draghi will clearly dance at today Press conference to keep the market guessing and not providing a bullish signal for EUR buyers. Draghi will be less dovish then March 8th but downplay market expectations for inevitable policy tightening. We anticipate that July will bring details for deceleration of asset pushed form €30bn to €15 in October and zero by years end. Given out base scenarios, especial given our view that US 10 years have topped at 3.01%, we are positioning ourself for a EURUSD rally.
By Peter Rosenstreich