ECB Preview: Draghi set to hold the Hawks back

With the macroeconomic picture unchanged after the ECB launched a lower asset purchasing program from the beginning of this year, No change from the ECB Governing Council in terms of the monetary policy instruments should be expected this Thursday. 

The inflation in the Euro area remains well below the ECB inflation target of close to 2% and even in the environment of strong economic growth no signs of inflation are emerging on the horizon except the most recent call from the US President Trump to implement the trade tariffs that would most likely lead to retaliation from the European authorities. In fact, the European Commission has approved retaliatory tariffs of 25% on imports of US steel, clothing, footwear and selected industrial goods according to the draft. Such activity is expected to raise concerns at the ECB. 

Favorable market developments

While the EUR/USD had been traded at around 1.2500 against the US Dollar at the time of the January ECB Governing Council meeting with ECB President Mario Draghi refraining from comments on the currency market development day after the US Treasury Secretary Mnuchin said in Davos that the US wants a weak Dollar.  The ECB officials refrained from comments on the FX market moves saying it is the G10  Washington accord that bans officials from verbal interventions and possible competitive currency market devaluation. 

Since the Euro is trading some 200 pips lower since the January ECB meeting and the policymakers debate since then has shifted to the question of timing of asset purchasing end that has seen ranging opinions and view.

Language change unlikely

It is rather unlikely to see the ECB Governing Councils hint on exit from current asset purchasing program at it March meeting. Nevertheless, the slight change in the language could have been indicative. 

We know that the current forward guidance says that the asset purchasing may increase in terms of size and duration if necessary. The ECB could possible opts for the change in the forward guidance with let's say removing the “size” from the wording. That would be a hawkish turn that could see the strong EUR/USD market reaction on the upside and this is what the ECB does not want. Therefore no change in the forward guidance is the best case scenario for the upcoming ECB meeting. The fresh macroeconomic forecast presented at the March meeting is unlikely to alter these expectations.