EUR Into This Week's ECB: What To Expect?
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The June ECB decision should prove to be a non-event for EUR on our economists’ base case scenario of no change in policy particularly ahead of the start of CSPP and another TLTRO. These policies afford the ECB time to assess the impact on the real economy before deciding whether further measures are needed after the summer. Expectations around this meeting are correspondingly low, with the rates market pricing virtually nothing in for the event. The market seems to be reassured that the ECB can bide it’s time given the improvement in macro data and the weakness in the Euro trade weighted index (TWI). Flow data also suggests that there has been little pre-positioning in EUR ahead of the event.
The depreciation of the EUR TWI since the start of the month (-1.9%) will also alleviate concerns over broader financial conditions in the Euro Area which have steadily improved through May. The EUR has found some support from the improvement in Euro Area macro data surprises which have recently moved back in positive territory. However, against this improving macro backdrop, and supportive of our view for a lower EUR by year-end, 5Y/5Y inflation break-even rates have not responded to the data improvement and have remained relatively stable since March.
With the ECB in stasis for now, the burden of proof for further EUR/USD weakness likely will continue to fall on the Fed and we look for USD gains (albeit modest) through Q3 as the Fed tightens policy once more in September.
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