The upcoming October ECB meeting this week is drawing a lot of attention from the markets. This is because it will be the last meeting with current president Mario Draghi as head of the ECB.
Following the bank’s rate cut at its last meeting, we aren’t expecting the ECB to adjust monetary policy again.
The minutes from the last meeting revealed an intense split within the policymakers at the ECB with several members against easing. In light of this, the likelihood of doves being able to affect further easing at this stage seems diminished.
Eurozone Data Has Worsened
However, since the last meeting, data out of the eurozone has worsened materially.
Several key indicators over the last month have indicated weakness in the eurozone economy. Chief among these was the September manufacturing PMI. This showed that factory activity in the eurozone had fallen into contractionary territory, marking the indicator’s lowest readings since the global financial crisis.
Inflation has been stubbornly low over recent months, with declines over September exacerbated by weaker energy prices. Industrial production and retail sales were also notably low over September.
German Economy Faltering
While eurozone data as a whole has been disappointing, data weakness out of Germany is also causing concern. The German manufacturing engine has slowed significantly over the last year fuelled by the decline of the automobiles sector.
With the US recently approving fresh tariffs to certain EU goods, the outlook for the eurozone remains clouded.
Forward Guidance in Focus
Although the ECB isn’t likely to announce any more easing at this point, traders will be keen to gauge whether any further easing will come this year.
The key to this will be assessing the level of division which remains in the ECB. If policymakers are still fiercely divided over the course of further action, this could see some upside in EUR as traders cover short positions on longer-term trades.
For now, the division among policymakers has been confined to any further asset purchases. As such, the market is still expecting a further cut to the deposit rate before the end of the year.
Lagarde To Continue with Easing
Christina Lagarde will take over from Draghi as of next month. As yet, the market is unclear on where she stands on ECB monetary policy.
However, it is likely that she will look to continue Draghi’s approach of monetary easing given the weakness remaining in the eurozone economy. Furthermore, given the downside risks, it certainly seems unlikely that the ECB will move away from an easing stance in the near term.
The current rally in EURUSD has seen price breaking above the 1.1217 level. However, for now, price remains within the bearish trend line from 2019 highs.
The 1.1218 level is the next topside market to watch with the 61.8% retracement from the summer highs coming in just ahead of that level. To the downside, any retracement lower will put the focus back on a further test of the 1.0926 level.