ECB grabbing all the looks lately – Danske Bank

Analyst at Danske Bank Mathias Mogensen assessed the prospects for the European Central Bank in the next months.

Key Quotes

“Following a rather balanced message from the ECB at the June meeting (removing the option for lower rates but downgrading the inflation outlook), yesterday's comments from the ECB's Mario Draghi marked a clear change in rhetoric, emphasising reflationary forces (which we still find it hard to buy into) and suggesting that in order to keep the effective policy stance unchanged, policy measures cannot stay constant as the economy picks up”.

“This is just another way of saying that a first ECB rate hike is drawing closer and sooner than markets expect. This thinking – to ‘normalise’ sooner rather than later despite a lack of any substantial underlying inflationary pressure – echoes to a large extent the stance from the Fed recently (where we also think the eagerness to ‘normalise’ is overdone)”.

“While we think the exit discussions are premature in both regions, there is clearly a chance that the ECB could re-introduce the possibility of hiking rates during H2 before ending the QE scheme. Our call for EUR/USD to move below 1.10 over the summer is clearly challenged as the FX market is very susceptible to such changes in rate communication”.