The European Central Bank's Governing Council is likely to make small changes to its forward guidance, aiming to gradually steer course towards the phasing-out of net asset purchases.
The change, which the market is unlikely to regard as hawkish, will probably involve QE guidance and would allow the Governing Council to build a bridge to the June or July meeting, when rhetoric would have to shift more decisively as the ECB communicates the end of net purchases either via quick tapering in the fourth quarter of 2018 (baseline scenario) or via a sudden stop after September (main risk scenario). We suspect that the part of QE guidance most likely to be revised – but not dropped outright – is the following: “If the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, we stand ready to increase the asset purchase programme in terms of size and/or duration”. Changes here would probably flag increased confidence that the Eurozone recovery – and hence inflation prospects – are now less vulnerable to downside risks and better positioned to cope with some moderate tightening of financial conditions. This raises the bar for the ECB to consider offsetting action in the event of an adverse shock.
We think that interest-rate guidance will remain intact, confirming the Governing Council’s expectation that policy rates “will remain at their present levels for an extended period of time, and well past the horizon of our net asset purchases”. At this stage, any non-cosmetic changes to this sentence should be regarded as a hawkish signal, which would probably trigger a meaningful repricing of rate-hike expectations. We think this would contradict the January statement by Mario Draghi, who basically ruled out a rate increase this year.
There are unlikely to be major changes to the new set of macroeconomic projections, although a slight improvement in the already-strong growth outlook is possible. Business surveys that, despite some weakening in February, remain at high levels and are generally consistent with some upside risk to the ECB’s short-term growth forecasts. Therefore, the ECB might raise its GDP estimate for this year from 2.3% to 2.4-2.5%, while leaving the numbers for 2019 (1.9%) and 2020 (1.7%) broadly unchanged.
On the inflation front, the picture is likely to be confirmed. The ECB has already trimmed its core inflation forecast for this year to a realistic and cautious 1.1%, while the trajectory for 2019 (1.5%) and 2020 (1.8%) is too steep for the central bank to consider any potential upward revision.
We think today’s ECB statement could act as a catalyst for EUR/USD reversing higher. As long as the ECB sends a message of increased confidence in growth and diminished downside risks, then another hurdle to the euro’s appreciation will be cleared.
Source: MyFXspot.com