HALISTER1: ECB PREVIEW: EUR Faces Upside Risks as Draghi to Hold, NFP Looms

ECB PREVIEW: EUR Faces Upside Risks as Draghi to Hold, NFP Looms

(Bloomberg) -- The euro faces upside risks heading into the ECB rate decision on Thursday, with President Mario Draghi and his fellow officials expected to keep monetary policy unchanged, analysts say.
  • EUR/USD mostly driven by Fed policy, and by U.S. non-farm payrolls data due a day after the ECB’s decision
  • Brown Brothers Harriman (Marc Chandler)
    • Meeting not key to EUR direction going forward, with U.S. jobs data due the next day seen as more important
    • Will watch for more details on corporate-bond purchases and TLTRO; focus also on new forecasts, and whether ECB allows Greek bonds to be used as collateral
    • Market view that ECB rates have bottomed may be EUR- positive
  • Nordea (Aurelija Augulyte)
    • Favors light positions into ECB meeting and U.S. data release
    • Sees EUR/USD longs as attractive as ECB could adjust its inflation forecast higher, while a Fed rate increase this summer is already priced by markets: MORE
  • BoFAML (Athanasios Vamvakidis)
    • June ECB decision should be a non-event for EUR; with ECB in stasis for now, burden of proof for further EUR/USD weakness continues to fall on Fed
    • Flow data also suggests that there has been little pre- positioning in EUR ahead of this week’s meeting
    • Base case scenario is for no change in policy, particularly ahead of start of CSPP and another TLTRO; these policies afford ECB time to assess impact on real economy before deciding whether further measures are needed after summer
    • Look for USD gains, albeit modest, through 3Q as Fed tightens policy once more in Sept.
  • Citigroup (Josh O’Byrne)
    • EUR swings could be limited this week; low expectations for ECB meeting as signals on rates and QE should be absent
    • Debate focusing over scope to signal inclusion of Greek debt in purchases program
  • Commerzbank (strategists including Ulrich Leuchtmann)
    • Medium-term ECB outlook unchanged
    • Fed reviving “divergence trade,” with EUR/USD weakness as a result of medium-term restrictive Fed policy and expansionary ECB measures
    • Fed signals are more volatile than ever; medium-term EUR/USD outlook subject to change more quickly than usual
    • Expects Fed Reserve to raise rates in June or July; forecasts EUR/USD at 1.10 in 2Q 2016
    • NOTE: Commerzbank cuts EUR/USD forecasts after “unintentional error” in Fed communication
  • BNP Paribas (Daniel Katzive)
    • Expect ECB to hold policy this week; little pressure on ECB to act now, with activity having picked up in 1Q, CPI expectations rising, and EUR effective rate stable
    • See risk of bounce in EUR/USD in near term as pair looks oversold and Fed is unlikely to raise rates in June; pair likely to rise considerably toward 1.16 mid-year forecast
    • ECB on hold means upside risk for EUR/JPY as BOJ will probably be the next G-10 central bank to ease
    • Favors EUR/JPY longs heading into summer and remain bearish on EUR/SEK
  • Morgan Stanley (strategists including Hans Redeker)
    • Expect EUR/USD to remain fairly range-bound as euro-area CPI, ECB rate decision are unlikely to impact currency significantly
    • ECB to hold monetary policy; CPI and growth projections could be revised upward due to higher oil prices, though unlikely to impact EUR meaningfully; markets only pricing a 5bp rate cut this year and ECB has made clear that further rate cuts are unlikely
    • Yield differentials affecting EUR will continue to be driven by Fed
  • Credit Agricole (Valentin Marinov, Manuel Oliveri)
    • Expect ECB meeting to discourage further EUR selling; continue to expect more upside for EUR/CHF
    • ECB meeting likely to strengthen market perception that central bank is no longer an active participant in global currency war, as it prefers to stimulate growth and CPI through euro zone’s lending channel
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

Tickers
2539Z GR (European Central Bank)

People
Mario Draghi (European Central Bank)
Athanasios Vamvakidis (Merrill Lynch International)
Aurelija Augulyte (Nordea Bank AB)
Daniel Katzive (Bnp Paribas)
Josh O'Byrne (Citigroup Inc)

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