Talking Points:
- Euro Likely to Rise if the ECB Fails to Deliver on Stimulus Expansion Bets
- BOE Policy Announcement Likely to be a Non-Event for the British Pound
A monetary policy announcement from the European Central Bank headlines the economic calendar in the hours ahead. Markets appear primed for an expansion of stimulus following strongly dovish comments from ECB President Mario Draghi at the Jackson Hole Symposium last month. A head-long dive into “classic” QE – that is, pressuring borrowing costs lower by buying bonds with printed money – seems unlikely this time around.
Purchasing sovereign debt instruments remains controversial and faces strong opposition from some Eurozone member states (notably Germany). To get past this barrier, the ECB will probably need to demonstrate the absolute necessity of this step by first exhausting other options in its arsenal. With that in mind, the central bank will likely want to wait to gauge uptake at its first TLTRO operation, scheduled for September 18.
Injecting liquidity into the banking system via ABS purchases represents another step frequently discussed by ECB officials over recent months. The central bank may be forced to attempt this scheme and show it to be insufficient to boost lending and re-inflate the economy before it can build an actionable pro-QE consensus.
With that in mind, investors looking for a big-splash announcement of aggressive easing may be disappointed. Such an outcome would come against a backdrop of heavily skewed anti-euro positioning. Indeed, data from the CFTC showed speculative net-short bets against the single currency hit a 21-month high last week. This seems to disproportionally skew probabilities in favor of a bounce amid profit-taking. Technical positioning seems to agree, with the charts hinting at fading downward momentum.
The Bank of England is likewise due to deliver its interest rate decision. While UK economic data has notably firmed relative to consensus forecasts over recent weeks, Governor Mark Carney and company will probably want to err on the side of caution for the time being.
Inflation remains anemic while leading survey data hints the economy’s momentum may be flagging, suggesting it will take some time yet for the hawks to build a voting majority on the rate-setting MPC committee. On balance, that means the announcement may prove to be a non-event for the British pound.
