BNP Paribas ECB Preview

The ECB is widely expected to leave policy unchanged at today’s meeting but the press conference should bring more details on the ABS purchase program announced in September. While President Draghi may still be unwilling to specify a target size for the program, analysts will attempt to refine their estimates based on any details on the range of the assets to be purchased. Any further clarity on the anticipated ultimate scale of the ECB’s balance sheet expansion will also be key. It is difficult to gauge market expectations heading into this meeting, which makes it problematic to define what outcome would be viewed as a disappointment or an over-delivering.

Bottom line for the EUR is that Dr. Draghi needs to convince investors that ECB action will be large enough to boost inflation expectations, and that policy responses will continue to escalate if inflation expectations were to fall further. If he fails and inflation expectations continue to retreat, real rates will move in the EUR’s favour once more and we could see some pressure on EUR short positions. On the other hand, success at raising or at least stabilizing inflation expectations should see the EUR continue to lose ground, most notably against the GBP and USD where expectations for 2015 rate hikes are supporting front-end nominal yields.

We remain broadly bearish on the EUR, running short EURCAD, EURUSD and EURNOK recommendations heading into this meeting.

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