All eyes on Draghi.
The euro has slipped back from its highest level since May 2016 this morning as investors eye the European Central Bank’s last major policy decision before the summer lull tomorrow.
Anticipation ahead of the governing council meeting has been building after ECB president Mario Draghi rattled bonds and drove the euro higher with bullish remarks on the state of the eurozone recovery at the end of June.
Although the ECB’s communications since the Sintra speech have sought to play down prospects of a tapering, German Bund yields have more than doubled in the last three weeks, and are at 0.556 per cent this morning. (Yields rise when prices fall.)
Having driven the euro to a 14-month high of $1.1583 yesterday, “traders are getting cold feet” ahead of tomorrow’s meeting, said Esther Maria Reichelt at Commerzbank.
“Caution is indeed warranted. While the ECB appears prepared to shift towards a less expansionary monetary policy, the turnaround will be gradual and cautious”, adds Ms Reichelt.
The euro is down 0.2 per cent against the dollar at publication time to $1.1530.
Analysts are divided over how much the ECB will shift its message on QE when Mr Draghi faces journalists for his press conference tomorrow.
Franck Dixmier, head of fixed income at AllianzGI, thinks Mr Draghi will stick to the script, stressing that any changes to the stimulus programme will be “gradual”, “slow”, and “cautious”:
If the [market] reaction from Thursday is too volatile, then the ECB will step back. A significant rate correction combined with a stronger euro would be counterproductive. For the time being, though, the process of normalization is being done well.
The ECB’s next policy meeting is in September. Mr Draghi is also likely to be addressing an audience of global central bankers at the Federal Reserve’s annual Jackson Hole conference in August – his first appearance at the monetary policy jamboree in three years.
Ken Wattret at TS Lombard thinks the ECB president take “more care” over his choice of words tomorrow:
Draghi knows he will be deluged with questions about his references to ‘reflation’, what motivated them and what they imply for policy so he should be well prepared.
Still, we do not expect to hear anything in the statement or the Q&A which fundamentally challenges the view that a tapering announcement is drawing near.
Read more on the ECB’s stimulus dilemma:
Second chart: Bloomberg