As the broader risk appetite picks up, Asian equities in the morning session with HSI and KOSPI Index outperforming in the EM space. The stabilization of risk is largely synchronous in FX, with USD retreating slightly vs EM space and trading mixed vs G10 basket. Elsewhere, WTI Crude steadied around 70 shrugging off the delta variant concerns and given the recent rates volatility.
Central banks come into focus today. For today’s ECB Governing Council meeting, CitiFX Strategy expects it to be dovish to reflect the emphasis of the new Strategy Review to be more persistently accommodative in a low-inflation world. With dovish expectations, the immediate market implications may be limited. Our economists flag BoE Deputy Governor Broadbent’s speech for GBP today. We also have central bank decisions for IDR, ZAR and UAH. No rate changes are expected but we will be keeping an eye on the guidance.
–We expect the 22 July Governing Council meeting to be dovish to reflect the emphasis of the new strategy to be more persistently accommodative in a low-inflation world.
–The main change should be in forward guidance to reflect the symmetric inflation target of 2% and more persistent policy that suggests a later tapering of asset purchases than previously expected (say in Q1 as opposed to Q4). Dovish risks include signaling later tapering at this meeting, while hawkish risks include opening the door to tapering at the September meeting.
–With dovish expectations, we think the immediate market implications may be limited. But the Meeting reinforces the ECB’s position as one of the most dovish central banks, which points to EUR weakness against high-beta currencies should global risk sentiment return, and a dovish ECB also should help broader sentiment at the margin.
All eyes on the ECB this afternoon and given their new inflation target, all paths lead to a dovish outcome? Not quite. After the ECB strategic review raised the inflation target, market participants have been scratching their heads wondering how the ECB plan to get to these loftier inflation levels given they have missed their previous targets for so long. Lagarde has highlighted this meeting as being important and piled some pressure on herself to deliver something dovish. However, she has all but told us that all we will be getting from this meeting will be new forward guidance. Our economists expect the “sufficiently close” to be replaced by “very close” to 2% in reference to moves in the policy rate with respect to inflation. I think that’s the least they can be expected to do and could be a minor disappointment if the forward guidance isn’t stronger (for instance, “at 2%” or “at least 2%”) or accompanied by other guidance elsewhere on QE.
To be clear, I don’t see the above being revolutionary for the Euro or the ECB narrative, but I do expect a bit of relief for the single currency if they disappoint on dovish expectations. Other things to watch out for will be suggestion of a successor to PEPP (base case), how the inclusion of housing will impact policy (potential hawkish slip up) and the outside tail risk which I discussed earlier this week of sequencing of QE and rate hikes (potentially very hawkish). The last point is of interest after a well followed news vendor put out a piece last week suggesting the ECB could start a shift away from NIRP at this meeting. On this, the market will be looking for any change in the statement that APP will still run until “shortly before” the first rate increase. That would be a game changer in my opinion and warrant material EUR longs. My strategy is to be small long EUR heading into the meeting, looking for that disappointment on dovish expectations.