ECB Preview - Expect EUR To Stay Inside Familiar Limits
FX Daily | Oct 26, 2017 10:24
Looking ahead to the ECB announcement later today, we can expect a reduction in the APP from Eur60bln down to Eur30-40bln - the lower end of this scale looking the more likely and looks set to prove to be the neutral pivot point on sentiment. Given the Governing Council's desire to limit any excessive response from the market, the duration is more likely to run for 9 months through to end Sept 2018, and forward guidance will likely suggest this will be 'left open' should the economy/data require it.
The overall tone of the press conference will be that of containment, pressing on the fact that the market will be ready to step up asset buying should downside risks materialise. Inflation is the key concern here, as activity is clearly picking up - certainly in Germany but also in the smaller member states, but president Draghi will insist this is also dependant on accommodative monetary conditions. As in all cases, they will not want to choke this off too early and will reiterate this point, but will also address the fact that this will be an adjustment to 'loose' policy measures.
Dependant on the flow of rhetoric, the balance of necessary 'tapering' tempered with a cautious tone should keep the EUR inside familiar levels.
EUR/USD looks intent on pushing back to 1.2000 again, but we see limited scope beyond 1.2100 at this stage, and certainly with the political backdrop which may also be covered in the press conference - questions on Spain to be expected. On the downside. 1.1660 is the line in the sand, but this will require some fresh impetus from the USD unless the ECB go with Eur40bln over 9 months, and even then, there is every reason to expect this to hold given the demand in the face of political scares seen in recent weeks.
In the crosses, EUR/CHF and EUR/JPY will be more responsive than say EUR/GBP, with 1.1800 (initial) and 138.00 key target levels on the upside respectively.
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