As we have been reporting all week, a meeting of the European Central Bank is upcoming on Thursday. The purpose of this meeting is for leaders and officials to try to iron out a solution to get the euro zone of out its extreme debt crisis. The sentiment of this meeting was hope and that showed last week when the euro traded at a three week high, but the rise of the value of the euro was only temporary as it dropped by the end of the day on Monday and has pretty much fallen flat since. By the end of the day today, we should have news about the meeting of the ECB and skeptics are not buying high on the euro ahead of the meeting.
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Last week’s comments from ECB’s president Draghi, hinting that bond purchases may start, raised expectations for the next ECB meeting to be held on Thursday. The EUR/USD was also boosted by his statements, propelling the pair away from the 1.2 level. However, according to Christian Lawrence, FX Strategist at Rabobank, “real disappointment may occur.”
“Focus since that point has been firmly on the possibility of sizeable bond buying and at a minimum Draghi must signal the ECB’s willingness to re-start the SMP or disappointment will be evident in the resultant price action with EUR/USD likely to drop sharply,” he explained, “there has been talk of the possibility of further cuts following last month’s 25bp easing but we think the ECB will want longer to assess the impact of 0% deposit rate before considering negative rates.” Lawrence said that they do not expect an LTRO3 given that previous LTROs reinforced the negative feedback loop between banks and sovereigns.
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Like we have been saying, if no real progress is made in the ECB meeting, which would be absolutely devastating to the value of the euro. This meeting is coming with very high expectations and it could be likely that these expectations are just too high and disappointment may be inevitable.
As of now, the focus is on speculation of a large bond buying and ECB’s potential to restart the SMP. If no resolution is made, the euro will surely take a nose dive.
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“1.2390-1.24 offers strong resistance for EUR/USD on the upside, while 1.2175 should offer support but a break through there will there will open up 1.2040 and push the focus back onto the 1.2 handle,” he forecasted.
Geoffrey Yu, FX Strategist at UBS, noted that the comments from German Finance Ministry and Bundesbank officials suggest that SMP reactivation is not a done deal, let alone the contentious issue of granting the ESM a banking license. However, UBS expectations are that on Thursday the ECB will “announce a reactivation of its Security
Markets Programme, but without offering any guidance on size, target bond yield or spread, or even the timing.” Yu explained that the words will be chosen carefully to satisfy markets that the ECB is willing to act, and at the same time signal to the targeted countries, likely Spain and Italy, that ECB support is not a substitute for economic reform. “We see no change in the refi rate at this meeting; in September we see a 25bp cut.” He added.
RBS Economists Team also believes that bond buying will resume. “Our assessment is that there are a number of options that the Governing Council could pursue in the coming months – from taking the deposit rate into negative territory, easing collateral requirements to more extreme measures like Credit Easing via private sector asset purchases – but with the exception of re-starting bond buying these are measures for future policy meetings.” They said.
Their preview is that the most likely move is a change in the minimum haircut on securitized or insecurities loans which national central banks would not be compelled to implement. “In the limit, the ECB may resort to full blown Credit Easing, but not in this meeting,” they concluded.
The European Central Banks forecast report also showed a division among the polled analysts. Some think that August will be the time to intervene again while others expect the ECB not to act this month. The only certainty now is that Draghi’s press conference will be closely watched by the whole Europe next August 2nd.
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Something else we wanted to add to today’s news is that the euro has made some ground towards a recovery. The Euro is recovering some ground against the US Dollar after falling from 1.2310 to test the 1.2280 region after ADP reported better than expected data. But following the US PMI July data, the EUR/USD has risen back above 1.2300 and currently the pair is pricing at 1.2315.
Do you expect results from the ECB meeting?
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