Next week on Thursday the ECB is supposed to deliver its regular monetary policy assessment. Euro traders already have an eye on the event because the ECB is faced with some unusual circumstances.
One is the strong currency. The common currency advanced across the board for the entire summer. It gained not only against the USD, but also against the GBP or the JPY. In other words, generalized EUR strength is not something the ECB needs in a crisis.
Another problem comes from the inflation front. It dropped significantly, despite massive liquidity injected in the system by the central bank. And, on its way down, it is about to break below the zero level.
What will the ECB do next week?
More Easing from the ECB?
It is hard to envision more easing from the ECB. It already delivered a record amount of stimulus for the European economies.
However it seems it is not enough. Compared to the United States, for instance, the European governments fell behind with the fiscal stimulus provided. As such, the USD declined, and the Euro failed to do the same. At this point, it looks like the ECB failed to spur inflation with money printing, despite the fact that its balance sheet more than doubled since 2016.
Youth unemployment was a constant problem in Europe, especially in Southern states, even before the pandemic. One of Mario Draghi’s main concerns during his mandate was to bring unemployment down, especially among the younger generation. The ECB had some success with that in the aftermath of the 2008-2009 Great Financial Crisis, but plenty of work remained.
The coronavirus crisis changed things again. Youth unemployment in Spain, Italy or Greece rose dramatically. In Spain, it reached 41.7%, and in Italy it exceeds 30%. These are real problems to consider, and they come on top of any policymaker’s agenda.
Coming back to the Euro, the CFTC non-commercial net long EUR position is the largest since May 2011. It currently sits at 27% of open interest, putting pressure on more upside to come. In other words, the market is frontrunning the ECB.
Under Mario Draghi’s term, the market knew that when it came to the ECB to deliver, it delivered big. Christine Lagarde’s term started with an exogenous shock no one expected. She did spectacularly well so far – but the bar keeps rising.