Danske bank is the latest to roll across the screen with their guess for ECB Thursday and they are going against the grain. They are writing off any QE and say the inflation projections for 2016 will be left unchanged and that the forecasts will argue that the medium term outlook has not worsened.
We can write these headlines all day long. They are important for a number of reasons. They give us ideas of what the ECB may do and they show us the sentiment in the market. However, I’m never satisfied with that as after all the initial ideas and thoughts it becomes an exercise in going round and round in circles.
We like to think outside the box here at ForexLive and so I’m not interested in what the banks think the ECB are going to do, I’m interested in what the banks are going to do.
Remember, it’s these same banks that will be affected by what the ECB spring from the tool box. If we get negative rates what are the banks going to do? Will they be happy to keep on depositing at the ECB for a loss (Euro neutral), will they lower lending rates to the economy and get credit flowing easier,(Euro neutral to slight positive) or will they look to deposit elsewhere in a safe environment with some yield (Euro negative). If banks decide to look for yield they could start going to the UK, US, Canada, Australia etc, which will see those currencies in demand.
It’s these types of questions we need answering as that will determine where the currency will go. Much of the real ECB action will be what happens after the event not over it. There will be plenty of reactionary moves but the longer term moves will be decided by the very people who are second guessing the ECB now. No doubt the likes of JPM, Goldman’s and the rest will have had discussions on what they will do on a number of ECB outcomes so tell us that instead.
