ECB Preview: A Buy Opportunity On Draghi Trying To Down The Euro?

The European Central Bank convenes for its first decision in 2018. The new year already saw the halving of the bond-buying volume to 30 billion euros from 60 billion beforehand. The program is set to run through September, and the big question is: will it end in September? Here is a preview of the big event on Thursday with the rate decision: at 12:45 GMT  and the press conference at 13:30.

When ECB President Mario Draghi announced this halving of the QE program back in October, he left the door open for extending it beyond September, keeping the pressure on the euro. He was in disagreement with the more hawkish members of the Governing Council.

In the December meeting, Draghi tried not to rock the boat, but we later learned that optimism was quite high in that meeting. The meeting minutes revealed a potential change in communication: perhaps an announcement about the end of QE in early 2018. The minutes gave the euro a boost.

However, the ascent of the euro hurts their efforts to push inflation higher and a few members began sending out warnings about the exchange rate. No less than three members came out to express concerns and their words contributed to halting the euro rally, although there are other factors in play there.

On this background, Draghi and co. are likely to refrain from any big announcements now, leaving the door open for extending the program beyond September, and making an official announcement a bit later on, perhaps in the March meeting, when they have new forecasts.

The announcement could also wait for June: apart from another set of new forecasts, making an announcement in June still gives markets enough time to adjust.

That announcement, whenever it comes,  may not be an immediate end to QE: the ECB could announce another reduction or taper until the end of 2018.

So if there is no announcement, what can we expect from Draghi?

Talking down the euro

He may certainly join the chorus and express concern about the exchange rate. A stronger euro makes European exports less attractive and for the ECB, it makes the prices of imported goods cheaper, thus pushing inflation lower. The ECB has a target of “2% or a bit below”. The current rate of 1.4% is more than a bit below. The core CPI figure, which stands at 0.9%, shows that underlying inflation is not going anywhere fast either.