Monex Europe: Forecasts for ECB Forum on Central Banking

Monex Europe: Forecasts for ECB Forum on Central Banking

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Monex Europe’s FX analysis team has published its expectations for this week’s ECB Forum on Central Banking taking place in Sintra, Portugal. Here are the key takeaways:

Not only will the ECB want to ease concerns in bond markets at Sintra this week, but they may also want to relay more hawkish forward guidance on their rate path as weak preliminary PMI data for June highlights how slowing growth momentum is narrowing the window of opportunity for the ECB to tighten policy.

In our view, last week’s economic activity data has increased the probability of a 50bp hike in July from the ECB and is now our base case.

The ECB’s emergency meeting just prior to the Fed announcement left the door open to an unscheduled announcement of the ECB’s antifragmentation tool. Nevertheless, given that the ECB instructed staff to expedite the completion of this tool as recently as June 15th, we believe Sintra is probably too early for its unveiling.

In the absence of the antifragmentation tool, the ECB could use Sintra to give markets more clarity as to how it aims to flexibly reinvest its maturing PEPP purchases, especially as sources from the ECB confirmed this week that the programme is not yet operational.

Although the need to intervene in bond markets has lessened over the past week or so, by announcing the parameters of the first line of defence against market fragmentation early, the ECB could reinforce the view in markets that spreads can’t widen in eurozone bond markets without justification. This may have value should the ECB wish to relay more hawkish forward guidance ahead of the July meeting, which will naturally widen spreads, or if growth conditions continue to nosedive.