September 8, 2021 13:21:03

Anticipation around tomorrow’s ECB meeting has intensified with a lot of noise coming from the hawks last week. They voiced many concerns about excessive monetary stimulus and generally want some kind of exit plan from the emergency QE programme (PEPP). The bank is set to revise up its staff projections given the current positive economic picture in the Eurozone. Vaccination rates have reached 60% of the population, labour markets are recovering and inflation has hit decade highs.

Yet, the revised forward guidance from the July meeting shows that the ECB is able to tolerate temporary overshoots of its new symmetric 2% inflation target. That new strategy and its implied more dovish stance was recently confirmed by Philip Lane, the bank’s chief economist.

Some analysts believe the ECB will “recalibrate” their bond purchases (from €80bn/month to €60bn) but avoid calling it a taper. Policymakers may also try to de-link rates forward guidance and the non-emergency QE programme (APP). But any disappointment on this given the more hawkish tilt this all implies, will see the euro weaken further. Unchanged inflation forecasts for next year and beyond would seriously dent that position too. We note option markets are not pricing in much higher volatility than normal around the meeting.

EUR/JPY compressing above Fib level

This yen cross hit a low at 127.93 in the latter part of last month as the risk mood soured. We then bounced off this support back above the 200-day SMA at 129.40 into the end of August. The pair took out a couple of Fib levels and had its sights on the 50% retrace point of the summer high to low move at 131.03.

However, this month has seen prices compress in a tight range around the 38.2% Fib level at 130.30. A period of tight range trading should end with range expansion, most often in line with the dominant trend. Bulls will aim for the 131 level where the 100-day SMA also resides.