Here's Why The ECB Won't Ease On Thursday

Don’t fire until you see the whites of their eyes

– Israel Putnam (disputed), The Battle of Bunker Hill

This Thursday, the ECB will conclude its highly anticipated monthly meeting. As a reminder, the central bank has been making a number of increasingly dramatic changes over the past couple of months:

• Back in June, Draghi and company cut the central bank’s deposit rate to negative and introduced its “Targeted” Long-Term Refinancing Operation (TLTRO), which later saw a disappointing take-up of only EUR 83B.
•  In July, the ECB announced that it would shift to meetings every six weeks and start issuing minutes in 2015, versus the current monthly meetings without minutes.
•  September brought another cut to both its lending and deposit rates, as well as the announcement that the central bank would begin buying “simple and transparent” assets in the secondary market.
•  Last month, Draghi emphasized that the central bank was “unanimous in its commitment to using additional unconventional instruments within its mandate” to ward off the threat of deflation.

After last week’s meager 0.3% annualized CPI reading, some traders are speculating that the central bank will be forced to take another dovish leap by introducing a full sovereign QE program, but we believe it's unlikely that the central bank will make any new announcements on Thursday for a number of reasons.

First and foremost, Draghi’s right-hand man, Vitor Constancio, let slip that the central bank was preparing to start buying sovereign bonds, if necessary, in the first quarter of next year. The (relatively) precise timeframe from a high-ranking ECB official suggests that the central bank is in wait-and-see mode for now.

Secondly, despite Draghi’s protestations to the contrary, it still seems that some of the members of the ECB’s governing council aren’t entirely sold on the idea. In particular, the conservative Bundesbank appears skeptical of the benefits of QE, especially with sovereign bond yields in some periphery countries already at historic lows. As a result, this week’s meeting may serve as a consensus-building gathering for action in the first quarter of next year, especially if inflation expectations continue their march downard in the coming months.

Finally, there is still some hope that increasing take-up of the TLTRO program will help to expand the ECB’s balance sheet and stoke economic growth. Much like an elementary school student putting off their weekend homework in hopes of a “miracle” snow day cancelling school on Monday, the ECB can still hang it’s hopes on the mid-December TLTRO auction as a possible savior.

Therefore, we anticipate that the ECB will refrain from introducing QE until seeing “the whites of deflation’s eyes,” likely sometime in Q1 of next year. While such an outcome may disappoint the most ardent euro bears, ECB President Draghi is likely to emphasize that all options remain on the table in his press conference, meaning that any relief rally in EURUSD may be short-lived. For more on the key technical levels to watch on the world’s most widely traded currency pair, see our technical piece from earlier this week.

For more intraday analysis and market updates, follow us on twitter (@MWellerFX and @FOREXcom).