ECB Preview: Strategy review in focus

• Guidance seen unchanged
• Inflation pick up
• EURUSD weaker, long-term uptrend barely holds

No major changes, review in focus

The European Central Bank meeting on Thursday is likely to produce some clues about future monetary policy direction, but nothing concrete. The focus will be on the strategy review as it gets underway, which is buying new boss Christine Lagarde some breathing space. She’s only in her second press conference so expect some further honing of communication skills. 

The focus of the strategy review this week will revolve around its scope and the timescale. Of particular interest of course is the mandate relative to price stability and its inflation target. We’d expect this ultimately to result in the ECB taking a more symmetrical approach to inflation. 

Given there are no fresh economic projections and the focus is on the review, guidance is not expected to alter materially. As I say, the review is a good way to buy time as the ECB remains in a holding pattern due to a) Lagarde’s own inexperience, b) the uncertainty over the economic outlook for the EZ and the world, and c) since Draghi embarked on an aggressive cut and QE restart as his parting gift, allowing Lagarde plenty of time to sit on her hands. 

The easing in trade tensions lately should support the ECB’s December view that ‘the risks surrounding the euro area growth outlook … remain tilted to the downside but are ‘somewhat less pronounced’. Of course whether the trade deal holds is another matter – but I would anticipate the signing of the phase one agreement to be reflected in Lagarde’s commentary.

However, ultimately with the market still expecting further easing from the ECB this year, we will need a clearer handle on where Lagarde is steering this ship soon enough.

Challenges: economy still spluttering 

Flash PMIs due on Friday will tell us more. A mild pick-up is seen, with the latest ZEW numbers showing a glimmer of hope, but the EZ is far from out of the woods. German growth has slowed to a six-year low. Green shoots seem few and far between. Even the UK (despite Brexit, if you care to add as an adjunct) is seen growing faster than any G7 European nation in 2020. Signs that PMIs are basing, but little recovery seen – the bottoming phase may linger.  

Inflation picked up in December, with annual headline inflation rising to a six-month high of 1.3%. Core inflation was steady from Nov at 1.3% also. Welcome news for the ECB, particularly the hawks on the council, but it’s too early to call this a material or sustained uptick. Lagarde is sure to be asked about this. Her answer will be of particular interest – and offering some scope for EURUSD volatility – as it could signal whether the ECB is about to raise its inflation forecasts.

EURU/USD: Uptrend in jeopardy 

The broad uptrend since last September remains in force, but near-term downtrend threatens to snap the bulls’ resolve. Following the swing high at the end of last year at 1.12390, the pair has trended lower to break down below the 50-day and 200-day moving averages, as well as snap the trend support around 1.1090 (red line). Key MA support on the 100-day line, which was touched and reject on Dec 20^th is formed around 1.1070. The low of Dec 20^th also offers some horizontal support close to this level at 1.10660. So, this region will be a key test as we get into the ECB meeting and the flash PMIs on Friday.