ECB Up Next
The market disappointment surrounding last night’s FOMC statement failed to continue into the European session as the dollar pared back some of its gains. The absence of any policy innovations, (including no change in the “late 2014” guidance) sparked a modest dollar rally but with the monthly payrolls data due tomorrow and significant event risk surrounding today’s ECB meeting, conviction is low with a range of policy options being debated in investor circles. Expectations for major policy announcements have certainly increased following Mario Draghi’s commentary last Thursday and we hold a fairly cautious view heading into the meeting as a consequence. Even though the market itself is divided over the exact meaning of his commentary and what is actually being sought, Draghi himself will understand that the perception of ‘failure to deliver’ could yet be damaging and lift periphery yields back up to uncomfortable levels. Our European economics team expects no ECB rate cut, but rather a formal endorsement of the reactivation of the SMP – without any guidance on size, target bond yield/spread, pace, or even the timing of the programme. Judging from recent comments by German officials, even this is far from a done deal and alternatives include small changes to collateral eligibility and other unorthodox easing measures. . As expected the BoE offered no change to policy. GBP was largely unchanged, following stronger July construction PMI which rose to 50.9 from 48.2 in June.
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UBS Investment Bank