ECB president Draghi goes into Thursday’s ECB rates meeting in seemingly positive mood, having last month hinted at a potential tightening of monetary policy while delivering an upbeat prognosis on the eurozone recovery.
However, Didier Rabattu, head of equities at Lombard Odier Investment Managers, believes ongoing weakness in inflation in the bloc and concern over the banking sector could dampen Draghi’s enthusiasm for raising rates.
He said: “While we agree that – in light of the broad-based cyclical recovery in the eurozone – the decline in deflationary risks will eventually warrant a reduction in the amount of monetary stimulus from the current extraordinary level, ongoing weakness in inflation suggests stimulus is still needed.
“There is no rush for even a very marginal and gradual reduction in the amount of stimulus from the European Central Bank.”
Rabattu warned a premature tightening in financial conditions could be negative for the recovery and given the current polarised environment, political considerations may also play a role a keeping the monetary policy easy.
Jordan Hiscott, chief trader at Ayondo Markets, said the ECB is left with a “perplexing situation” over tapering, particularly on the back of strong euro performance against the dollar, robust economic data and the short-term fix of Greece’s debt situation.
He said: “It’s certainly an interesting time for the euro/US dollar, with speculative shorts dramatically reducing in the past session as mean reversion traders get caught on the extended move higher.”
Hiscott added: “Could the possibility of starting a tapering of sorts as early as September derail the fragile positive growth sentiment we have seen recently?”
Elsewhere, Chris Beauchamp, chief market analyst at IG, said the likelihood of any further hawkish commentary from the central bank could squeeze the euro even higher against the dollar.
“European markets failed to capitalise on last week’s rally, hamstrung by euro strength, so the hope for this particular crowded trade is that Mario Draghi will row back on the change in language from earlier in the month.
“Given the bank’s predilection for easing, it seems unlikely that they will err too much on the hawkish side.”
