European Central Bank (ECB) Speculation to Drive GBP EUR Outlook

Mark Renders | Getty Images

Mark Renders | Getty Images

Combining the Fed's concerns over inflation, with the economic damage caused by Hurricane Harvey and add into the mix the prospect of more damage from Hurricane Irma and any chances of a USA rate hike look serious diminished.

In fact, it seems that ECB President Mario Draghi himself triggered the financial storm on June 27 in Sintra, Portugal, during his introductory speech at the seminar on central banking-in front of definitely very reactive listeners. On the Euro front, BofAML argues that Draghi can not avoid talking about the Euro in this meeting.

One reason is that the euro has appreciated against other currencies as the recovery gathers pace, braking price growth as imports become cheaper. In this scenario, we could expect to see the euro take another step higher.

However, the ECB Governing Council would likely have ignored them anyway given the strength of the Euro, geopolitical tensions and global risks, including North Korea and Hurricane Irma. "These remarks can influence FX markets to some degree", NAB argues. Morgan Stanley strategists do not expect any pushback from ECB policymakers on the euro's strength as the currency has been rising on the back of strengthening economic fundamentals.Moreover, the ECB has a noticeable bias of talking about the currency when it is on a weaker trajectory, according to data-mining of all the ECB policy statements and press conferences since 1998. We believe 1.14751.1625 will hold the EUR's downside and suspect the higher end of this range may be the limit.

Will the European Central Bank announce QE tapering?

Analysts polled by Reuters predicted no policy change on Thursday but that bond buys, now running at 60 billion euros a month, will be cut by a third in a decision later this year.

Only 15 of 66 economists polled by Reuters said they expect the European Central Bank to announce a reduction of its monthly asset purchases at Thursday's European Central Bank policy meeting - a sharp reversal from a month ago when slightly over half of respondents expected such a move. They have revised their real gross domestic product (GDP) growth forecasts for the euro area in 2017 and 2018 to 1.9 percent and 1.8 percent respectively, by 0.2 percentage points. While the revision seems widely expected, its size introduces symmetric risks for the Euro. Risks to the Euro around this meeting are skewed to the downside in our view.

This year, the Euro has strengthened by over 14% against the United States currency. "But for that, our policy needs to be persistent, and we need to be prudent in how we adjust its parameters to improving economic conditions". We don't expect pushback with Euro at current levels as it has been rising for "good" economic reasons and hasn't had a negative impact on growth yet. The forecasts might reveal to what extent the European Central Bank thinks that the stronger external value of the Euro will impact GDP and inflation'.

BTMU Research: The ECB is most likely to use the meeting to set up the unveiling of detailed QE tapering plans at their following meeting in late October.

SEB Research: policy rates unchanged - forward guidance unchanged - QErecalibration/extension - QE:Extension to 2018 and "re-calibration" to €40bn/month as of 01/18 - inflation outlook: Re-iteration that "the ongoing economic expansion (...) has yet to translate into stronger inflation dynamics". The rapid rise in the Euro will only reinforce these concerns. The ECB also needs to decide how to address the issue of the firming euro.

Will Draghi spook the markets?

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