Will the owl jawbone the euro currency later in the day?


I'll try to keep things brief and succinct in this preview here. The ECB isn't going to be announcing any changes to policy later at 1145 GMT and its statement should reaffirm more of the same kind of stance as we have seen back in July here.

So, in terms of key policy changes or major changes to their policy outlook, that isn't expected although there are suggestions that they will be more confident about the latest economic outlook as seen from yesterday here.

That said, I would argue that any such optimism is easily outweighed by the slump in inflation to a record low in August. And if anything else, policymakers can use that message as a 'selling point' to try and jawbone the euro lower later in the day.

Euro currency

The rise in the euro is arguably the main focus point as we get towards the meeting statement later and also Lagarde's press conference.

I would expect Lagarde to be the one to pull the weight here but whether or not she will deliver on bringing the euro lower is still a coin toss at this stage.

Given that we saw a record low core inflation in August, she can point to that and a potentially fragile, uneven recovery path to keep euro bulls in-check in the near-term.

In the context of the bigger picture, it may be tough to hold the single currency back but at least she should expend some effort in not making her job any tougher in that sense.

Economic forecasts

The ECB may present better economic projections later today but I would expect Lagarde to play them down as the nature of the recovery is still looking rather uncertain.

This is also part and parcel about jawboning the euro, as a more reserved message will help to nullify any potential for the currency to rise on the back of an improved outlook.

Besides, with virus cases starting to reemerge across the region, it wouldn't be prudent for her to talk up a major recovery at this point in time.

ECB vs Fed

Lagarde may make a mention or two regarding the recent change in Fed strategy i.e. average inflation targeting but the ECB pretty much have their hands tied in this issue right now; their own strategy review is only due to conclude some time next year.

She should reaffirm somewhat that they are also holding a similar view as the Fed on inflation but her wording should try and distinguish that the ECB is approaching it from a different angle i.e. 'same, same but different' kind of approach.

Again, this also ties back to the jawboning of the euro as any message to say that the Fed is well ahead in the race to the bottom will only reinvigorate euro bulls in the long run.

Potential for more action?

There is certainly reason to believe that the ECB can take further action at this stage, should they ever feel the need to be safe rather than sorry.

But given how central bank communication works these days, this is unlikely to happen today and more likely we will see any further action being taken in December.

Among the reasons for that are the record low core inflation, the potentially waning recovery in the euro area, the risk of inflation expectations deanchoring, and also the need to manage the euro currency should it appreciate too much.

All of that is likely to culminate into the ECB extending and possibly increasing its PEPP stimulus but they also have other options i.e. more TLTROs, rate cuts, rate tiering.

But again, we'll see how things go in the next few months before reevaluating all of the above going into the December meeting. For now, keep with the status quo.