Synopsis: Danske presents insights on the anticipated ECB policy meeting next week, forecasting a steady stance after a series of consistent inflation and growth figures since September. The communication is expected to subtly hint at a tightening bias, considering the potential advancement in PEPP reinvestments. Despite this, the market predicts an unchanging policy rate in the short term, followed by a slow rate cutting cycle from Q2 next year.
ECB On Hold: Following a series of predictable economic indicators post-September, the ECB is anticipated to maintain its policy rate, marking a period of stability since June last year. The forthcoming session is not expected to bring substantial alterations, given the recent economic trajectory.
Subtle Shift in Tone: ECB President Lagarde might hint at a nuanced shift towards a tightening bias during the press conference, specifically in the context of PEPP reinvestments. This subtle communication strategy aims to keep future options open while signaling a gradual policy shift.
Market Expectations and EUR Dynamics: Despite the stable outlook, markets foresee a slow rate reduction cycle beginning Q2 next year, reflecting a cautious approach towards economic recovery. In terms of immediate currency impact, a subdued reaction is expected for the EUR, with major market movement likely reserved post the Fed meeting on November 1.
Continued Bearish Outlook on EUR/USD: Danske holds onto a bearish view on EUR/USD, anchored by factors like relative terms of trade, real interest rates, and comparative unit labor costs. They predict a potential downtrend in EUR/USD, positioning it at around 1.06/1.03 in the 6 to 12-month horizon, despite acknowledging possible short-term USD vulnerabilities.
Conclusion: In the current economic narrative, where steady inflation and growth data are at play, the ECB's upcoming policy rendezvous is likely to reflect a continuation of its prevailing strategy, with a cautious nod towards future tightening. This anticipated non-event for the EUR might see the market's gaze shift towards the consequential Fed assembly for substantial cues. However, amidst these monetary dialogues, Danske's prognosis suggests keeping a speculative eye on the underlying economic metrics that continue to drive currency movements, particularly advocating a strategic bearish stance on EUR/USD in the medium term.