ECB: Can Draghi scare the EUR bulls? - BNPP

BNP Paribas economics team expects today’s ECB meeting to be a holding operation, with the central bank likely to offer little new information on its plans or expectations to begin tapering asset purchases from January of next year.

Key Quotes

“To the extent possible, we expect President Draghi to lean dovish in his comments. The sharp appreciation of the EUR and rise in bund yields over the past month is likely a concern for the ECB and the central bank will likely be keen to avoid exacerbating the resulting tightening of financial conditions.”

“While we except the ECB President to avoid language which could add ot EUR appreication pressure, he may struggle to find a formula which substantially reverses EUR strength. After all, the market is only expecting a reduction of the pace of asset purchases to begin in January, and President Draghi is unlikely to discourage this anticipation beyond perhaps noting that the ECB is sensitive to the impact of exchange rates and financial conditions in formulating policy. Draghi was already dovish at the April and June meeitngs with only limited impact on the currency. Still, our positioning framework suggests long EUR positioning is now very stretched, while our momentum framework shows sharp retreats in EUR relative equity and relative rates momentum recently; if FX momentum also begins to falter, EUR positions  could begin to unwind. In this context, even a modestly dovish ECB message could do some damage to EURUSD.”