FX_IDC:EURGBP   Euro / British Pound
Once again the ECB is challenged with managing market expectations, while at the same time assuaging concerns within the governing council that the prospective tightening profile (if we can call it that) is starting to lag the growth seen (on average) in the region. Emphasis is being placed on the possible wording on the easing bias, which naturally is hard to include with economic traction developing despite some modest fade in the growth metrics.

Sluggish inflation will be the counter-balance to this argument/view, and herein lies the direct and indirect reference to exchange rates, which also serve to add headwinds (or tailwinds) to exporters, who are in the spotlight at present given the proposed actions of the Trump administration in the US. Nevertheless, some form of adjustment in the statement would appease the hawkish members, and the ECB are ever hopeful that the market is or has priced in the eventual end to QE , hence the constant reiteration that rates will not rise until well past the end date.

Focus on the staff projections will be on the growth figures, with core inflation picking up, and forecasts on the headline rates tempered by currency forecasts which will have been adjusted higher. Economic expansion is more likely to be revised up if anything, given the ongoing robust outlook, and only minor adjustments are anticipated at best if at all. There is a strong chance we get a less volatile reaction from the EUR today, but the market is tightly constrained by limits ahead of 1.2100 on the downside, while 1.2500+ looks a stretch at this point given market positioning.
Kind regards

Rajan Dhall MSTA
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