What's next for the ECB and the euro
The ECB kept all policy rates unchanged and maintained the monthly QE purchases of EUR80bn. The ECB "continues to expect the key ECB interest rates to remain at present or lower levels for an extended period of time, and well past the horizon of the net asset purchases". The QE programme is still "intended to run until the end of March 2017, or beyond, if necessary, and in any case until [the bank] sees a sustained adjustment in the path of inflation consistent with its inflation aim".
Overall, the comments from President Draghi were slightly more hawkish than expected. According to Draghi, the ECB's assessment following the UK referendum on EU membership "is that euro area financial markets have weathered the spike in uncertainty and volatility with encouraging resilience". Added to this, Draghi downplayed the importance of the very low 5y5y inflation expectations as he said it could be difficult to access the move in market based inflation expectations following the Brexit vote.
We expect the ECB to ease monetary policy at the next meeting as we foresee a weakening in economic data. Our call is that the QE programme will be boosted temporarily to EUR100bn for the rest of 2016 and that the programme will be extended until September 2017. We do not forecast any further rates cuts from the ECB.
EUR/USD barely reacted in line with expectations as Draghi signalled a wait-and-see attitude but left the door open for more easing.We maintain our call that EUR/USD will fall modestly near-term (3M forecast 1.07). Further ECB easing and US growth outperformance should drive EUR/USD lower in the autumn. Medium term, we maintain our long-held call for a higher EUR/USD towards 1.14 on 12M on valuation and current account differential.
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