The European Central Bank will announce its latest policy decision on Thursday at 11:45 GMT. After last month’s big decisions when the Bank outlined its monetary policy course until at least the summer of 2019, the upcoming meetings, including this week’s gathering, look set to be uneventful ones. However, with some confusion surrounding the ECB’s forward guidance on interest rates, markets will be seeking clarification from President Mario Draghi at his press conference.
In June, the Bank shocked the markets by accompanying the decision to end its asset purchase program (APP) with a dovish rate guidance. The updated forward guidance to keep interest rates at present levels “at least through the summer of 2019” was open to differing interpretations but ultimately pushed out rate hike expectations towards the end of 2019, sending the euro plummeting. The single currency plunged by about 2% from the announcement time to when Draghi’s press conference ended as investors pared back expectations that the ECB would begin hiking rates before the summer of 2019.
Further underlining the Bank’s dovish tone was tying the winding down of QE to “incoming data confirming the Governing Council’s medium-term inflation outlook”. Although there’s only a low probability that the ECB would decide to extend QE beyond 2018 even if growth and inflation didn’t evolve quite as expected, and it would require a major crisis to derail its plans, it nevertheless places the Bank on the side of caution. With Eurozone data still pointing to a deceleration in growth momentum, the euro’s outlook isn’t about to change to a more positive one anytime soon, as the ECB is unlikely to signal a steeper rate path until downside risks have subsided substantially.
Should the Eurozone economy gather some steam in the coming months, it’s possible the ECB may yet bring forward the timing of a rate hike. For now, though, investors will have to guess whether “through the summer of 2019” means July, September or later. Reporters are sure to seek more clarity from Draghi about the timeframe at Thursday’s press conference. However, it’s likely that this was a carefully crafted wording to give the ECB flexibility to raise rates during or after the summer depending on how the economy performs. Traders should therefore not get their hopes up in expecting Draghi to clear up the ambiguity in the language.
Another point to consider are fresh views by Draghi on heightened trade risks. Fears of increased trade barriers have already started to hurt Eurozone business confidence even though China has so far been the United States’ primary target. Any deep concerns about the potential impact of a trade war would cloud investors’ outlook further and weigh on the euro.
However, with no new quarterly staff projections at hand, Draghi is not expected to deviate much from the last meeting on his views, with the euro probably seeing only limited reaction. A reiteration of his dovish stance could see euro/dollar slipping towards the 1.16 level, with immediate support coming around 1.1650. A breach of the 1.16 handle would take the pair closer to the 3-week low of 1.1572 set on July 19.
An upside push could come from Draghi possibly hinting that a rate hike in the third quarter of 2019 is more likely than the fourth quarter. Euro/dollar could see immediate resistance coming in the region between 1.1720 and 1.1750. The 1.1720 level is the 23.6% Fibonacci retracement of the downleg from 1.2413 to 1.1506, while the 1.1750 mark halted the pair’s advances on Monday. A break above this resistance area would clear the way to the July peak of 1.1790 and bring into focus the 38.2% Fibonacci level of 1.1852.
