The monetary policy meeting of the European Central Bank (ECB) will be key for markets such as the euro and the DAX this week. This could either be a crucial turning point for the long held policy of easy money, or it could be a moment for disappointment. There will be some key markets hanging on the outcome of the meeting this week. We assess the outlook for forex, equities and commodities markets with technical analysis of several key instruments.
Euro strength is increasingly topical recently as EUR/USD has pushed to $1.2000. A stronger euro dampens already sluggish Eurozone inflation and is causing exporters across the region to negatively revise their outlooks. Despite speculation of potential tapering of asset purchases, it is likely the ECB will remain pretty cautious on monetary policy when the Governing Council meets this week. Draghi suggested at Jackson Hole that a “significant degree of monetary accommodation” was still needed; whilst according to the latest ECB meeting minutes, euro strength is a also concern for the Governing Council. Although not unanimous, noises from ECB sources are beginning to try to jawbone the euro lower. A notably hawkish Ewald Nowotny may have suggested we should not “overdramatise” the euro rally, but Governing Council Vice President, Vitor Constancio (close to Draghi) was far more dovish noting that the worldwide reflationary phase that seemed likely earlier in 2017 has not materialised. Announcing tapering too soon would send the euro even higher and further dampen inflation. Draghi is similar to Yellen at the Fed and is a dove at heart and given core inflation remains stuck at +1.2% there is no need to push ahead too hawkishly and Draghi has already made wriggle-room with “autumn”. A disappointment for the euro bulls would be negative near term but give a medium term buying opportunity with the relative paths of policy tightening.