Currency traders on edge as European Central Bank meeting looms

Posted September 07, 2017

We'll know soon enough with North Korea but that's certainly true of the debt ceiling.

Barclays Research: We expect that the ECB will leave its policy settings unchanged at its September meeting (Thursday), but the meeting presents several risks for the currency: 1- The ECB could remove the asymmetry around the language of its Asset Purchase Program, with upside risks to the Euro.

The ECB's 25 policy makers have plenty to talk about: some say the euro area's robust economic recovery warrants the winding down of bond purchases - now running at 60 billion euros ($71 billion) a month - while others point to feeble inflation as a reason to keep stimulus going. Why should the ECB stop its asset purchases when " they are far from their inflation target, and they keep revising their inflation projections downwards" the bank's global FX strategy team asks?

The current QE program is due to end in September.

Following the decision, ECB President Mario Draghi will hold a press conference. In contrast, the difficulties of a strict policy with a more expensive euro and a bit higher interest rates will be mere nuisances, compared to the helplessness in view of a new crisis.

Among this hike in the euro - which is likely to drive down inflation - investors will be watching for indications that ECB President Mario Draghi has become concerned about the exchange rate, and that the currency's strength could delay any policy tightening plans.

The slow pick-up in consumer prices is a well-known issue to the European Central Bank officials. Traders will be analyzing comments from the European Central Bank chief on Thursday for any clues on the timing of its taper . It will make imports cheaper and send headline inflation rates to even lower levels, in the opposite than the required direction. The market reaction was dovish: the German yield curve steepened (lower ST yields, higher LT yields), the euro lost ground and equities profited after Draghi explained the future of APP. Although the Eurozone GDP growth was lower in 2014 compared to today, the impact of the exchange rate on the inflation is an empirical fact and can not be completely ruled out.

"We don't expect them to announce the start of tapering this meeting, but we do expect them to give us an idea they will start in January".

A separate Reuters poll forecast the central bank would announce a reduction in its monthly asset purchases as early as October, with the programme ending completely by the end of next year.

In early United Kingdom company news, Imperial Brands confirmed it will sell a minority stake in Spanish distributor Compania De Distribucion Integral Logista Holdings SAU - known as Logista - with plans to use the proceeds to reduce its net debt and undertake a share buy-back.

The news lifted yields on US Treasuries, with the 10-year yield holding back to 2.1 per cent from its 10-month low of 2.054 per cent touched on Wednesday. The 1.20 could be an interesting top for tactical sales and pressure the EURUSD toward 1.1715 and 1.1495, the minor 23.6% and the major 38.2% retracement on April - September rise respectively. Originally the market had high hopes for this European Central Bank meeting but expectations were tempered significantly last week when Bloomberg reported that they may not have the appetite to rush into a decision in September and is unlikely to reach a QE decision before October 26. Any deliberate vagueness in the ECB's message, as well as more aggressive jawboning of Euro by the President, could keep the single currency under pressure in the near-term.