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ECB comes in focus as the much anticipated meeting approaches - MUFG

FXStreet (Delhi) – Derek Halpenny, Research Analyst at MUFG, suggests that we had been pretty convinced that the ECB would not take any action at the forthcoming meet but have to admit we are not as convinced after reading the comments made by ECB Governing Council member Nowotny in a speech in Warsaw yesterday where he was pretty pessimistic in regard to current economic conditions in Europe.

Key Quotes

“If the dollar does advance sooner rather than later, it may well be versus the euro given the monetary policy meeting is taking place next Thursday. In admitting that the ECB was “clearly” missing its inflation target he stated that additional “structural instruments” were required in order to get growth going in the euro-zone.”

“There was a strong message to governments to do more in regard to structural reform but the reality in the euro-zone for some time has been that the onus has rested on the ECB to take action. While Nowotny and probably most ECB Council Members are frustrated with that, the ECB may soon feel obliged to take additional action.”

“The comments from Nowotny appear more grim than his previous comments and that may well reflect the evidence of renewed economic weakness in Germany. The 5.2% plunge in exports and weak factory orders and industrial production highlight the vulnerability of Germany to external demand weakness. This of course is the country where perhaps fiscal stimulus should now be implemented but constitutionally Germany’s hands are tied – a fact that must surely be fuelling the disinflationary impetus in the euro-zone as a whole.”

“Our view at this point is that the ECB will refrain from any action next week but will be a little more explicit in indicating that they are closer to additional easing with an eye on the December meeting.”

“By then it will be clearer whether the FOMC will act or not in December and the ECB will have a much clearer view of broader financial market conditions and whether the “unwarranted tightening” of the monetary stance has persisted. But Nowotny has thrown a degree of greater uncertainty into next week’s meeting and hence the euro is unlikely to advance much ahead of that key event.”

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