The risk of a surprise from the ECB has risen after yesterday’s round of weak PMI numbers,¹ which not only highlighted that the German manufacturing sector is sliding deeper into recession, but also that the fallout from global trade tensions and rising risks of a no-deal Brexit scenario is not limited to Germany. Today’s Ifo reading is unlikely to be much better and the doves at the ECB will likely push for a quick move. There ARE good reasons for Draghi to wait until September, when not only the next round of forecasts will be due, but also the outlook on the Brexit front should have become a bit clearer. Most importantly perhaps, the Fed cutting rates as expected next week would likely see markets expecting another follow up move from the ECB, although the doves countering that and easing measures from both the Eurozone and the US ahead of the summer lull in August should help market sentiment to stabilise. Ultimately a 10 bp cut from the ECB will not make much of a difference in real terms and the main merit for many will lie in the signalling effect. With that in mind Draghi will have to deliver a very dovish presser today to keep investors happy and a cut without a signal that there is more to come could have a more negative impact on markets than a very clear signal that the ECB is readying a comprehensive set of measures for September. However, Draghi & Co. have been bold before, so it would be unwise to rule anything out.
The Euro continues to trade softer ahead of the Rate announcement at 11:45 GMT and the Press conference 45 minutes later. Even EURGBP broke below the key 20-day moving average yesterday to end 52 consecutive trading days above this important baseline.
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Head Market Analyst
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