The ECB September meeting is just around the corner as two days from now, we will hear what the central bank’s response to the low inflation is. Expectations range from dovish to neutral to hawkish, and in this article, we will have a look at what each camp awaits from the ECB.
Before going into details, it is worth having a look at the chart below. It shows the financial conditions in both the Euro area and the United States. While easing is clearly visible in the United States, it is not so in the Euro area. Hence, if any trader looks for an explanation of the higher EURUSD exchange rate, this is pertinent. ECB, therefore, lagged or still lags.
Is it time to change something?
Scenarios for the ECB Meeting
In the hawkish camp, the ECB will likely ignore the recent developments in inflation. More precisely, if it views the low inflation as temporary or caused by transitory effects, the statement will be bullish for the common currency.
How about the exchange rate? The ECB may downplay the recent verbal intervention delivered by its Chief Economist, Philip Lane, and say that it does not target the exchange rate and cannot do anything about it. Case close.
The neutral camp looks for the ECB to deliver a mixed message. It could signal that it is open to increasing the PEPP program or that it stands ready to adjust the tiering multiplier. However, without committing to neither the hawkish nor the dovish camp.
In the dovish camp, the ECB is expected to make it clear to market participants that it does not tolerate low inflation that threatens to break below the zero level. It may express concerns about the exchange rate and the way it dampens the ECB’s efforts to bring inflation to the target. It may also signal that deflation is at risk, and thus it must act sooner rather than later.
Out of the three scenarios, and in light of the financial conditions in the Euro area, the bias is that the ECB will deliver a neutral to dovish statement. Moreover, during the press conference, Lagarde will be grilled by press representatives with questions regarding inflation, the interest rate, and what the bank will do in the future.
Therefore, it is not necessarily about what the ECB does on Thursday, but about what it signals it will do. In any case, expect the Euro’s volatility to increase significantly.