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The European Central Bank gathers for its policy-setting meeting on Thursday and the big question on traders’ mind is when President Mario Draghi & Co. will put an end to its aggressive bond buying program and begin to hike interest rates.
At the March 8 meeting, the rate setters took markets by surprise and unexpectedly dropped its pledge to expand the easing program if needed, signaling that they are on track to end the stimulus scheme before the end of the year.
However, since the meeting last month, data have pointed to an economic slowdown in the beginning of the year, making the picture murkier for the central bankers. That means traders have dialed back expectations that the ECB will wind up the QE program in September when the asset purchases currently are slated to end. Additionally, markets are no longer pricing in a summer 2019 rate rise, but rather looking toward the end of next year for the first hike.
So, what will the ECB do at their upcoming meeting this Thursday? Analysts at ING have compiled this handy chart to outline the four most likely scenarios, for both the policy statement and Draghi’s news conference.
At the most dovish end of the specter, there's a possibility Draghi ratchets up his concerns over the outlook for the eurozone economy, the ING analysts said. That could include comments about the recent weak data and concerns over the possible trade war between China and the U.S. In this scenario, ING expects euro bulls to head for the exit and yank the shared currency down to $1.21.
The euro has already declined sharply ahead of the meeting to trade at $1.22 on Wednesday, but that is more due to a rally in the U.S. dollar on the back of higher U.S. Treasury yields. But exactly because of this recent selloff, ING said it’ll be difficult for Draghi to talk down the euro further on Thursday as there’s little evidence to suggest it’s overvalued. The euro traded around $1.25 a month ago, down 1.3% over the past month.
“The bottom line is that it will be difficult to see a dovish Draghi-led decline in the EUR given the relatively low expectations going into the April ECB meeting. The ECB chief would have to be on fine ‘dovish’ form to knock further steam out of the EUR’s medium-term bullish trajectory,” the analysts said.
“For now, we retain our EUR/USD target of 1.27-1.28 this summer on the back of a hawkish ECB policy re-assessment — which should set the pair on a path towards 1.30 by year-end,” they added.
Over at HSBC, economists expect the central bank to strike a careful, dovish view to avoid a “premature and unwarranted tightening of financial conditions.”
The policy statement will be out on Thursday at 12:45 p.m. London time, or 7:45 a.m. Eastern Time. Draghi will hold a news conference at 1:30 p.m. London time, or 8:30 a.m. ET.