As it’s ECB day I want to hear what you think they are going to do. Let’s not restrict it to just today though but your overall thoughts for now and the days, months ahead.
Is inflation coming back and is the recovery strong enough to stay their hand on any action?
Is falling inflation still a problem and the recovery weak enough to warrant the ECB opening the tool box?
Is today the day or will they wait a bit longer?
I’m in the wait and see camp. I think there was enough in the data over the last few months to show that the recovery is here. That said the German numbers are a tad worrying as they are the yard stick for Europe. There’s a small part of me that says that maybe they will think the recovery needs a little helping hand, and it will be a little one. As long as the recovery does continue they won’t act on inflation unless it falls to around 0.5% in the headline and/or the core. As for the exchange rate, it will be a massive shock if they act just to curb the strength. In the space of a few months (the last 3 or 4 if I recall correctly) Draghi has gone from “The FX doesn’t matter, we don’t look at it” to “The rate is becoming an issue” and that’s potentially worrying.
One thing we should be very aware of is that Mr Draghi is a very shrewd customer and we shouldn’t underestimate him. If they announce anything it will be the plans for something rather than actual action, like the OMT, much heralded, never been used. In that scenario the market will have to judge the actual threat level for using any new tool.
If he can’t talk this market down then 1.40 here we come. If he does talk it down then it will need to be on something very convincing or the falls will be hoovered up and 1.40 here we come.
What do you say?
