If you are thinking that if there is any element which one can say is mutual between the European Central bank and the US Federal Reserve bank is this that they are meeting for the last final time during this month. Apart from this, the divergence is the main denominator, which is pulling their currencies in a complete opposite direction.
The expectations are sky high when it comes to the European Central Bank since the president of the ECB, Mr Draghi, hinted that more stimulus could be announced on coming Thursday. There are obviously a few different ways to achieve this target, but the question is which one of them is the most effective one and which can cause the utmost amount of damage for the euro zone’s currency? For us, cutting the base rate is very much already priced in the market and henceforth, we are seeing the euro where it is now. So, the other option is either he can extend the QE program until 2017 or the final option is that the ECB could perhaps now add new instruments and include the list of the debts of those countries in their shopping list, which they previously left out purposely.
Though, how much Draghi can actually do given the economic data is picking up does put handcuffs on him. If the economic data was devastating, it would have been much easier for him to choose any of the above paths. But the economic situation has been improving gradually, and the only excuse, his organization can use is that it is not fast enough and inflation is not picking up its pace either. But, this excuse will not be immensely famous when it comes to the German Bundsbank, which opposed the launch of the first QE program at the start of this year and adding more stimulus will not be something that will be easily digested by them.
The ECB’s deposit rate is -0.2% and the yield on German two year bonds have touched -0.4%. The speculations that the ECB will cut the deposit rate, because it does may not feel comfortable in adding new exotic flavors on its shopping list- Greek debt, has also pushed the yields of the Italian and Spanish 2 year bonds in a negative territory. The question of over deliver or under deliver is basically focused on this element- how much the ECB is going to move its deposit rate? We think this could be between -0.4%-0.6%.
The chief qualm for the ECB is inflation and they want to import this at any cost, hence Draghi has been aggressive in his comments. Nonetheless, the fact is that inflation has picked up massively, especially, if we compare this number before the ECB started their quantitative easing program and where it stands today. The number for headline inflation is 0.1% against -0.6%, which was before the ECB triggered the QE.
In Summary, on Thursday, we do not think he will be that aggressive given the strength we have experienced in the economic data this week.