This is going to be one of those boring meetings where nothing new is expected from the European Central Bank. The president of the European Central Bank, Mario Draghi, has already laid out the monetary policy plan for the region during his most recent meeting on June 14. The bank has already talked about ending the quantitative easing program.
Subject which matters the most for traders is; if the ECB is going to give away anything on the interest rate hike?
Nobody is expecting the ECB to move the needle on the interest rate hike. The market is expecting the interest rates to stay at their current level at least for some quarters. Market participants are aware of the fact that the ECB is keeping all the doors open to keep the flexibility element in its policy. Everything is dependent on the economic growth and inflation, if any of these two show weakness, the bank could change its sailing path with little notice.
Back in June, Draghi touched on the future reinvestments of maturing securities of its QE portfolio. Of course, on Thursday, we need more details on the possibility of new composition of the QE portfolio. Any surprise here would impact the bond yield of the respective country.
Therefore, the Q&A session would be interesting, Draghi would have a chance to talk about his assessment of the economic health of the region in a more informal manner.
The growth in the EU is strong and we do not deny that but one cannot refute that the growth muscles are little fatigue. So, investors would be looking to asses if the ECB is going to add anything new on this subject. If Draghi sends out the message that he is comfortable with the current growth rate, it would be deemed as a hawkish stance by the market participants. As a result of this, the Euro could get some tail wind.
The ECB is keeping a close watch on its inflation target of 2%. There has been significant improvement in inflation, thanks to higher fuel prices, improving labour wages and continues drop in the unemployment rate. We do not expect anything significant here, so the inflation may not have much of say despite its significant importance.
Also, one of the most dovish member of the ECB and close ally of Draghi, Peter Praet, also thinks that the current inflation state allows winding down the QE but not strong enough to start the discussion on interest rate hike.
Another important factor which is providing a lot of support to inflation is also the weakness in the euro against the dollar. Weaker currency makes the import cheaper and it is in the ECB’s favour, to not let the currency gain strength.
