ECB To Ease This Week; EUR/USD En-Route To 1.08 - BNPP

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We think the EUR is likely to fall towards the end of the year and target a fall in EURUSD to 1.08.

The principal driver of our view is our expectation of a 25bp rate hike by the US Federal Reserve, which is not fully priced into markets. In addition, the European Central Bank is likely to ease monetary policy further at its September meeting, extending the timeframe of its asset purchase programme by six months to September 2017. The combination of Fed tightening and ECB easing should stimulate financial outflows from the eurozone, weakening EURUSD; we continue to forecast a fall in the pair to 1.05 by the end of 2017.

The ECB’s July post-meeting statement was little changed from June’s. While the UK’s vote to leave the EU was described as an additional downside risk, ECB chief Mario Draghi said the ECB was sticking to its base-case forecasts of a continued economic recovery and a gradual rise in inflation. Our call for the next policy step remains a extension of the asset purchase programme probably by six months to September 2017. We think an announcement should come as soon as the next meeting on 8 September.

The eurozone’s large current account surplus means outflows on the financial account, in particular portfolio flows, need to be strong and persistent for the EUR to continue to weaken. These outflows cannot be taken for granted and are likely to be sensitive to the broader risk environment. Furthermore, if expectations of EUR depreciation moderate, outflows are likely to become increasingly currency hedged.


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Expect These 3 ECB Policy Announcmnet


The Governing Council is not closer to being able to demonstrate convincingly that its current policy settings are compatible with headline inflation returning to target by the end of the forecast horizon.

We look for three ECB policy announcements:

1- We think extension of asset purchases for at least six months would be a first step in the right direction,

2- alongside changes to QE modalities to circumvent any scarcity issues.

3- We also expect a 10bp cut in the refinancing rate to -0.1% to be the first step, ahead of a 10bp cut in the deposit rate to -0.5% in March 2017.

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The European Central Bank meeting is expected to be a 'no change' affair

  • The announcement comes at 1145GMT
  • ECB President Draghi gives a press conference at 1230GMT
  • No big change to policy is expected today (economist still expect an extension to QE by year end); Draghi is expected to be on the dovish side in his new conference comments though
  • If there is a change in policy from the bank it is expected to be perhaps extending its QE bond-buying program by six months (from March to September 2017)
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