February 20, 2018 Facebook  twitter  Google+
Euro May Face Volatility Despite ECB Inaction Daily FX
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he ECB monetary policy announcement headlines the economic calendar in European trading hours. Euro area financial conditions have stabilized having recovered from stress in the aftermath of the UK “Brexit” referendum. Meanwhile, the year-on-year inflation rate has drifted toward the top the range prevailing since mid-2015 having steadily improved since April. On balance, this hints that policymakers probably don’t feel pressured to expand an already aggressive monetary stimulus effort that includes hefty asset purchases and a negative deposit rate. 

The announcement may still generate volatility however. First, the updated set of macroeconomic projections prepared by ECB staff may be telling, with the direction of revisions hinting which way the central bank may steer in the months ahead. A downgrade of the inflation outlook may imply that further easing is on the horizon and weigh on the Euro. Needless to say, an upgrade that undermines the case for near-term stimulus expansion could have the opposite effect. 

Second, investors will look for clues about potential changes in policy implementation as ECB President Draghi gives a press conference following the announcement. The central bank is soaking up so much paper as to spark concerns about insufficient liquidity in those assets it has deemed acceptable for purchase. If policymakers’ promise to boost accommodation as needed is to be seen as credible, they may need to expand the range of securities that qualify. Doing so or signaling such a step is imminent may be enough to put pressure on the single currency.
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