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Euro Turns to ECB Policy Speeches for Direction This Week

Fundamental Forecast for Euro: Neutral

- ECB rate cut odds through end of year remain low – that could change this week.

- Only data of interest are Euro-Zone inflation figures due out on Friday.

- See the DailyFX economic calendar for the week of September 25, 2016.

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Our forecast called for a ‘neutral’ performance by the Euro last week, and a middling week it was: the best performing cross was only up by +1.12% (EUR/AUD); and the worst performing cross was down only by -0.96% (EUR/NZD). The simple fact is that an absent economic calendar coupled with a waterfall of significant events abroad rendered neutral any Euro-borne influences. However, as we peer into the last week of September and Q3’16, the lack of central bank overhang could see the Euro move back into the spotlight and thus, more volatility to develop.

Like last week, there aren’t many meaningful Euro-Zone data due out over the coming days either, so traders’ collective attention shouldn’t be trained on the economic calendar. That is, at least until Friday, when the September Euro-Zone Consumer Price Index will be released; until then, the calendar is effectively barren. Like last week, any volatility among EUR-crosses throughout the week will be thanks to central bank interference: there are nine ECB speakers (plus the September ECB meeting minutes) between Monday and Thursday without the Bank of Japan or Federal Reserve stealing away attention.

While all of the speakers have the ability to move markets, only a few should leave lasting impressions. Monday is particularly saturated with policymakers, with the ECB’s Couere, Draghi, and Nowotny all slated to speak. End of the week speeches should draw equal fervor, with the ECB’s Chief Economist Peter Praet and President Mario Draghi drawing close attention on Thursday. As is typically the case, President Mario Draghi’s remarks on Thursday should carry the most weight.

Our expectations for President Draghi’s public speeches remains unchanged: he should be more dovish at the margins towards the end of the year. At the September ECB policy meeting, ECB President Draghi stated that the effectiveness, not the size, the QE program may be challenged given the constraints the capital key now poses. “We tasked the relevant committees to work on the smooth implementation and the changes that are needed to ensure the smooth implementation,” he said. Whether or not the ECB is effectively stimulating the market – or if it needs to tweak its operations – should be drawn out from these efforts.

We maintain that, if a shift in the ECB’s operational policy is coming soon (rather than another rate cut), President Draghi is the person to convince markets of its forthcoming nature (rather than Chief Economist Praet, who would be better suited to convince market participants of a forthcoming policy change like a rate cut). While we don’t expect the ECB to do anything substantial before the next round of SEPs are released at the December meeting, we do expect to hear greater discussion regarding the finer points of the QE program. Ultimately, the ECB will have to choose to remove the -0.40% deposit rate threshold for conducting bond purchases (as it’s running out of eligible German debt) or to remove the capital key ratio purchasing parameters (thereby allowing the ECB to purchase more peripheral debt).

What’s been admittedly a quiet month of September, and really, Q3’16, has left us with little new information regarding the state of affairs in the Euro-Zone. We know the recovery is moving forward, but it’s happening at a frustratingly slow pace. As the current situation presents itself, is it necessary for the ECB to cut rates again? No; but the Euro-Zone is in dire need of stimulus efforts. In the vacuum that fiscal policymakers have created, the ECB is truly the only game left in town; so it may only be a matter of time before they’re forced to open the liquidity spigot again. –CV

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