ECB Preview: Too early to commit to any explicit end to QE purchases - ING

Analysts at ING suggest that the name of the game for markets will be reading President Draghi's dovish bluff at this week's ECB meeting (Thu) and their economists see it as too early to be committing to any explicit end to QE purchases.

Key Quotes

“They don't feel the EUR needs to necessarily sell-off on this; it would presume that investors have been positioning for an ECB policy shift as early as this week – and we don't feel that this has been the case. While the central bank is likely to toe the party line of a strong EUR being a ‘source of uncertainty’, President Draghi may struggle to find evidence suggesting that the recent move higher in the EUR has been anything but justified by fundamentals (albeit weaker fundamentals else-where as well).”

“Indeed, a range of models that we monitor tend to support this stance:

(1) EUR/USD close to 1.23 still remains undervalued based on our short-term financial model;

(2) EUR/USD below 1.25 means that the ECB’s macro ‘pain threshold’ has not been breached – and the central bank will find it difficult to credibly cite recent currency strength as a drag on the real economy (just yet); and

(3) the OECD PPP estimate – a medium-term anchor point for EUR/USD – is around 1.32-1.33 (still some 8-9% away from current levels).”

“As such, attempts by President Draghi to talk down the EUR this week may prove ineffective – with markets in recent years getting better at spotting dovish central bank bluffs. We remain inclined to fade any post-ECB meeting move lower in EUR/USD, with the 1.2140/50 area providing support. Any move below here is a good buying opportunity; the ECB cannot change the positive fundamental EUR backdrop.”