How ECB Could Prepare Investors for More Easing There are 5 - TopicsExpress

How ECB Could Prepare Investors for More Easing There are 5 central bank meetings this week but the European Central Banks monetary policy announcement will be the most important. In fact the ECB meeting could even trump the U.S. non-farm payrolls report in terms of its impact on the EUR/USD. In no way shape or form is the ECB ready to roll out Quantitative Easing but given recent economic reports, particularly from Germany, the case for additional stimulus is growing. Although core Eurozone CPI growth ticked up in the month of August, the steep decline in German retail sales, increase in unemployment, deterioration in consumer, business and investor confidence all point to a loss of momentum in the Eurozones largest economy. While it would be easy to blame all of this on the Russian/Ukraine conflict, Russian exports represent only 1% of German GDP. The problem for Germany and many other countries in the region is restrictive fiscal policy. Low inflation is still a big problem but todays increase in core CPI growth could make Mario Draghi more comfortable with leaving monetary policy unchanged next week. With the first TLTRO program expected in September, the central bank may opt to wait and see how the uptake is before increasing stimulus. Yet we do not expect the central bank to stand aside and do absolutely nothing this week. The course for the ECB is clear and the only question is how quickly and in what form will they will ease again. There are many ways that the central bank could prepare the market for more stimulus without actually making any immediate changes to monetary policy. The easiest way would be to significantly lower their GDP and inflation forecasts - dont forget that their staff forecasts will be released next week. They could also pre-announce ABS purchases with details to follow. The latter would obviously have a more significant impact on the euro than the former. Some economists are also calling for a 10bp deposit rate cut which would constitute easing but we think the central bank will postpone this move to September. Unless the ECB does nothing at all or makes only a small change to their staff forecasts, the ECB meeting should accelerate the losses in the EUR/USD.

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