EUR/USD is basically stuck in a range since the Brexit shock. Mario Draghi can send it to a new direction, After our own ECB video preview and 3 additional forecasts, here are the two more:
Here is their view, courtesy of eFXnews:
EUR Risks Into The ECB – UBS
No additional stimulus; focus on UK referendum, Italian banks. We don’t expect the ECB to deliver any new monetary policy stimulus this week (21 July). Instead, the UK vote to leave the EU will likely be the key focus, while the issues in the Italian banking system are likely to feature highly as well. The ECB will also have an opportunity to comment on the first TLTRO2 auction (results announced on 24 June) and on its Eurozone Bank Lending Survey for Q2, which will be released on 19 July.
Extension of QE beyond March 2017 seems increasingly likely. While the ECB is likely to argue that the UK vote to leave the EU increases the downside risk to growth and inflation, we do not expect it to deliver substantial monetary easing on 21 July. Instead, we expect the ECB to maintain its ‘wait and see’ mode and continue to focus on the implementation of its measures from March. Nevertheless, we think the to-be-expected deceleration in Eurozone growth will likely skew the ECB’s decision further towards an extension of asset purchases beyond March 2017, with a decision likely due on 8 September or 8 December. In other words, we consider it rather unlikely by now that the ECB would switch off QE in April 2017
EUR will focus on the ECB’s overall signal for direction. Most of the solutions to enlarge the pool of assets available for purchase could result in steeper curves. But, as we discuss, the link between curve steepness and EUR/USD direction is tentative at best. Instead, what matters for the currency is the overall monetary policy signal and whether it leads to a higher level of EUR rates.Market is already quite dovishly positioned, which may imply upside EUR risks
As we discuss, the market is likely already assigning a non-trivial probability to outcomes that lead to a drastic increase in the pool of assets. This has dragged the level of rates lower and equates to a dovish signal. In the absence of strong evidence to this end, however, we think the risks seem to be skewed to the upside for the EUR heading into the ECB meeting on Thursday.
What FX Investors Should Expect From The ECB – Morgan Stanley
Market focus will be on Draghi’s first press conference after finding out about the Brexit vote.
Forecasts are not expected to be updated at this meeting so markets will have to wait until September until any change in policy but the tone will be closely watched. Inflation expectations as measured by the 5y5y swap have bounced to 1.35% from the lows of 1.25% last week but are still not expecting inflation to reach 2% for more than a decade. The ECB should be focused on financial market and banking stability which is addressed via LTRO facilities. Note that yesterday’s release of the ECB Bank lending survey, while mostly done before the Brexit referendum, was quite upbeat about credit suggesting that LTROs had improved bank profitability. The equity markets may disagree, having fallen 17% since the March ECB meeting, but we do expect the ECB to acknowledge relatively calm market post the Brexit vote. Draghi could acknowledge that there will be business uncertainty after the Brexit vote, which if translates into lower growth and inflation, would require further easing
What would make EUR move lower?
If Draghi reverses his statement from March, now saying that interest rates could be cut further then it would weaken EURUSD on the day but only lastingly weaken the currency if there are expectations of more than a 20bp cut.
Suggestions of an extension of QE won’t be able to weaken the EUR as further corporate bond purchases would not be able to bring down long term government bond yields sufficiently. Rates investors will be watching for any clues on how the ECB could tweak current government bond purchase programme rules to allow for any extension of QE without hitting bond availability limits, though this type of discussion could likely be left until the September meeting.
We are now forecasting EURUSD towards 1.18 by the end of this year and are still long EURGBP.*
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