ECB Preview

On Thursday 6th June at 1245 BST/ 0745 ET the ECB will announce interest rates. The market expects no change in rates or any unconventional policy action at this meeting. ECB President Mario Draghi will hold his monthly press conference at 1330 BST/ 0830 ET.

This meeting will also include the latest ECB staff forecasts on growth and inflation. Due to the weaker tone to growth and the sharper drop in commodity prices than expected in recent months, we expect the near term growth and inflation forecasts to be revised lower, however we doubt that they will be revised low enough to justify more rate cuts, at least not in the near term and we expect the forecasts to continue to predict a mild economic recovery in the second half of this year.

We expect Mario Draghi to point to the slight pick-up in the survey data in recent weeks, which suggests that the currency bloc’s economy could be stabilising, albeit at a low level. Thus, he may say that the economy is good enough for now, but that the ECB is willing to act if we see a further deterioration in the growth or inflation outlook further ahead.

At the last meeting the ECB cut interest rates and Mario Draghi hinted at the prospect of negative deposit rates (the rate charged to banks to keep their excess reserves at the ECB). Cutting deposit rates into negative territory is a controversial move – it essentially floods the economy with money threatening to stoke inflation and, usually, weakening the currency. Since the last meeting there have been contradictory comments from ECB officials on the effectiveness of negative rates, thus we expect Draghi to be careful not to upset any ECB members with his comments and he may choose to avoid the topic altogether.

The market will be on the look-out for the shape and pace of further rate cuts from the ECB, so if Draghi artfully side-steps the negative deposit rate question then we could see some upward pressure on the EUR. The markets are enthralled by the prospect of the Fed tapering its QE programme, thus if the ECB has put further monetary accommodation on hold this could be mildly bullish for the EUR, at least in the short term.

Interestingly, although the Fed has been talking about the end of QE3 this has not been USD positive and EURUSD is back above 1.30. One reason is because the interest differential between German bund yields (as benchmark for the Eurozone) and US Treasury yields has started to move in the EUR’s favour, on the back of a stabilisation in growth and inflation data in the currency bloc. Thus, if we see this spread continue to recover on the back of a less dovish than expected Draghi then we may see another leg higher in EURUSD, at least in the short term.

Some key resistance levels of note include 1.3090 – the top of the daily Ichimoku cloud and a key resistance zone, then 1.3115, 1.3155 and 1.3200- the top of the medium-term range. In the short term, the bias is mildly higher above 1.3080 – the daily pivot. If Draghi surprises the market and actually cuts rates or waxes lyrical about negative deposit rates then expect a sharp decline in EURUSD. 1.3025 then 1.2970, the Tenkan line on the daily cloud cloud, are key support levels.