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Further easing by ECB next week, a close call? – BTMU

FXStreet (Barcelona) - Derek Halpenny, European Head of Currency Strategy at the Bank of Tokyo Mitsubishi UFJ, says inflation figures in EMU and Germany could be relevant in next week's ECB meeting.

Key Quotes

"The euro has rebounded back above the 1.3200 level after Reuters yesterday quoted ECB sources as stating that there would be no monetary easing steps announced at next week’s policy meeting. With euro short positioning becoming more substantial, unsubstantiated stories of this kind can have the necessary impact on stabilising the currency."

"In reality, if any decision is finely balanced, the flash estimates for August inflation from Germany today and the euro-zone tomorrow may well have a bearing on any decision taken next week. After ECB President Draghi’s comment at Jackson Hole that inflation expectations have become unanchored, the ECB will be sensitive to any further evidence of downside inflation risks worsening."

"The German EU harmonised annual inflation rate is expected to come in unchanged at 0.8% in August – any undershoot will just serve to intensify speculation of easing next week. Both a small rate cut and/or the start of ABS QE are possibilities for next week and we would lean toward ABS QE as being the more likely of the two, simply because it is one of the measures that was announced in June, is already being worked on and looks like less of a panic move. Draghi believes in the June measures and therefore full implementation is the natural conclusion."

"We should also perhaps be careful not to overplay the inflation expectations comments from Jackson Hole. It was very significant but how reliable are financial market indicators during the month of August, during holiday thin trading conditions? It would appear very rash for the ECB to undergo additional monetary easing based just on falling inflation expectations during August."

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