ECB Preview Dovish Surprise Possible but Draghi Likely to Leave His Options Open

Matt Weller
By :  ,  Head of Market Research

Amidst the ongoing Brexit hullaballoo (latest headlines suggest Theresa May will survive her no confidence vote as we go to press), tomorrow’s ECB meeting has no doubt snuck up on many FX traders.

As it has long telegraphed, the central bank is widely expected to announce the end of its asset purchase program, though proceeds from its purchases will likely be reinvested for “an extended period of time.” A recent run of soft economic data (including last month’s disappointing 1.7% y/y reading for Q3 GDP and the lowest German Markit PMI reading in more than two years) may prompt Draghi and Company to revise their forecasts for growth and inflation in the coming years down slightly.

That said, inflation and wage data has been generally solid, so talk of another round of LTROs (a cheap loan plan for European banks) is premature in our view. The only other potential dovish surprise would be a commitment to leave interest rates unchanged for a longer period (beyond “at least through the summer of 2019). However, experienced central bankers like Draghi prefer to retain their flexibility whenever possible, and an extension of self-imposed commitment six months in advance seems highly unlikely.

Technical View: EUR/USD

Assuming no big surprises, the euro’s reaction to the ECB meeting should be relatively limited. Bulls and bears are likely to duke it out over tweaks to the language and economic forecasts, with the potential for neither side to make any meaningful progress. Technically speaking, EUR/USD is trading in the mid-1.1300s, directly in the middle of its 4-week range between 1.1275 and 1.1475. A hawkish surprise could lead to a bullish break from this range, with buyers looking to target the mid-October highs near 1.1600 next, whereas a more-dovish-than-expected statement or press conference could take us down to test the 18-month lows near 1.1215.

Source: TradingView,

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