Preview for ECB Rate Decision and Outlook for EUR-crosses
- First meeting of 2017, without new staff projections, unlikely to see ECB change policy or alter course.
- ECB President Draghi's press conference matters more than the rate decision itself today.
Webinar Schedule for Week of January 15 to 20, 2017
Monday, 7:30 EDT/12:30 GMT: FX Week Ahead: Strategy for Major Event Risk
Wednesday, 7:30 EDT/12:30 GMT: Central Bank Weekly
Wednesday, 8:15 EDT/13:15 GMT: Live Event Coverage: US Consumer Price Index
Thursday, 7:30 EDT/12:30 GMT: Live Event Coverage: European Central Bank Rate Decision
Gven that it is the first meeting after the European Central Bank changed policy in December 2016, as well as the fact that there aren't any new staff economic projections (SEPs) due out today, the scope for the ECB to act at this meeting, one way or the other, seems very limited.
ECB President Mario Draghi is likely to balance out his optimism over near-term economic data against longer-term concerns about the political scene in Europe and inflation that remains barely positive. To be clear, economic data has been improving steadily in recent weeks, beyond consensus expectations by a wide margin. The Euro-Zone Citi Economic Surprise Index finished last week at +74.1, up from +71.1 a week earlier and up from +63.3 a month earlier on December 16. One of President Draghi’s favorite measures of inflation, 5-year, 5-year inflation swap forwards, are pushing higher as well, finishing at 1.745% at the end of last week from 1.666% four-weeks ago.
If data continues to improve over the course of 2017, we would expect that market pressure on the ECB to back away from its most aggressive easing policies would (inappropriately) increase. One year from now, market participants think that the ECB will be closer to a rate hike (17.5% chance at the January 2018 meeting) than a rate cut (13.4%). Yet to do so, we believe that the ECB will need to see a meaningful improvement in actual inflation readings; the latest ECB forecasts see inflation ending 2017 at +1.1%. If this proves reality, then the ECB might opt for another tweak in its policy, extending the length of its QE program but reducing the pace of purchases.
Any such announcement would come at a meeting with a new set of SEPs, which come in March, June, September, and December. Accordingly, the coming ECB meeting tod may bring a lot of hyaype, but it seems very likely to be a rather neutral meeting that may not swing the pendulum of understanding about the ECB’s next move.
--- Written by Christopher Vecchio, Senior Currency Strategist
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