The ECB's December accounts stated that: 'The language pertaining to various dimensions of the monetary policy stance and forward guidance could be revisited early in the coming year [2018]'. We do not expect the ECB to change its language next week.
Instead, we think the first change in language on certain parts of the stance and forward guidance will come at the 8 March meeting , as the potential end of QE is still 8 months away and the effect of the new purchase rate is still to be assessed.
Recently, comments from hawks within the Governing Council (GC) have dominated the financial press. They reflect the view of a more holistic view of the economy and inflation , and we see this view slowly getting traction within the GC.
The growth indicators continue to surprise on the upside. We view core and 'super core' inflation as the key figures/variables to follow for the timing of the first hike.
Recent concerns on the FX from GC members may have helped fade the rally in EUR/USD for now, and if backed by Draghi in the Q&A next week this could help EUR/USD move towards 1.20 short term. However, we no longer expect a sustained dip below 1.20 and further out, we look for 1.28 in 12M.
We expect the trend for tighter spreads and flatter curves in the euro fixed income market to continue. Further, we expect to see repricing of the front of the EONIA curve.
Key topics for the Q&A: EUR appreciation, changing the forward guidance (FG) and the pace of FG changes, the dominance of hawkish messages in the financial press.
To read the entire report Please click on the pdf File Below: