No change in QE and rates
We may get more info on specifics of tapering
Higher inflation forecast
Less dovish stance and possibility higher move in Euro
The big announcement was made during the European Central Bank’s (ECB) last meeting but it would be naive to underestimate the power of the central bank. The European central bank will announce its monetary policy on Thursday and investors will get more flavour for the ECB’s plan to scale back on it’s asset purchase program. The market is widely expecting that there will be no change on their policy and the bank will remain dovish in their language. We reason this is where investors are largely underestimating the president of the European Central Bank, Mario Draghi. We do anticipate that Draghi is going to surprise the market on Thursday and his stance may actually rattle the forex market as the year ends. The ECB may not emphasize on the link of it’s tapering process and inflation situation, and rather pay more attention to the stellar economic progress throughout this year in the eurozone. The bank may sound more optimistic towards it’s inflation due to the improving labour and economic conditions.
The European Central bank is likely to sound less dovish on Thursday while the market is largely expecting that the bank would be rather dovish with it’s approach. Thus, there is a clear scope for the euro to move higher as the market gets a surprise when Draghi takes the stage. The Euro-dollar pair has the potential to touch the 1.20 mark on Thursday and the bond yields could pop significantly. The euro currency without any doubt has been the best performer among major currencies this year and a surprise by the ECB could make the Christmas for the euro bulls even better. The currency has the potential to move well above the 1.20 mark in 2019, because the market hasn’t priced in the prospects of the ECB increasing the interest rates. The option markets clearly shows that the risk reversals trading is skewed in favour of call contracts.
If something which is going to keep Draghi tamed on Thursday it will be the weakness in the wage growth. The bank’s inflation forecast and the actual number has been out of sync. The monetary policy has failed to produce the kind of spark in inflation which the ECB was expecting. The ECB is closely monitoring the pay rise in the largest economy of the eurozone, Germany. The real wage growth index has grown at the slowest pace this year since 2014 and it is mainly due to the lack of rise in pay demand.
