Danske Research discusses its expectations for the ECB’s July policy meeting on Thursday.
“For the EUR, the outcome of the upcoming ECB meetings has become highly important. Our long-held view remains that what matters for the EUR is what the ECB can do to create inflation and in that light it is the rate cutting part of the easing package that really matters for FX markets . A sizeable cut in the deposit rate (and 20bp is a bare minimum in our view) would force a greater share of excess liquidity on the market, help turn around inflation expectations and weaken the EUR,” Danske argues.
However, history has shown that market expectations have tended to exceed the ECB’s eventual easing package announcement at the time of the ECB policy meetings. A tiering system might further erode the effect and push the EUR higher. Overall, we do not expect much market reaction in July, but rather consider the September meeting to be pivotal for the EUR,” Danske adds.