ECB caught between hawkish path and slowing growth

This week’s European Central Bank (ECB) meeting sees its president, Mario Draghi, once again leading a process that will drive volatility through increased clarity over the current stance of the committee. The wider picture has certainly moved away from one which necessitates a more hawkish stance, and towards a more accommodative role from the ECB. Consumer price index (CPI) inflation has dropped to 1.5%, with the core number standing at 1%. Meanwhile, the favoured 5y5y inflation swap measure utilised by the ECB also stands at 1.5%.

Eurozone’s economic growth facing a slowdown

Meanwhile, economic growth within the region is clearly stalling, with the German slowdown providing particularly worrying given its role as a growth driver for the wider group. Much of this will be associate with the US-China fuelled global slowdown, yet with US-EU trade in manufactured goods remaining at risk, it is no surprise that the biggest eurozone exporters are suffering.

As such, while the pathway has been clearly geared towards a more hawkish stance from the ECB, there is a growing pressure to start taking a more accommodative stance.

ECB policy meeting: what to expect

For the most part, we are unlikely to see any substantial shift in policy. Interest rates are not expected to move, with markets seeing the next rate move coming in the form of a hike in 2020. Meanwhile, with the quantitative easing (QE) programme wound down just two months ago, we are unlikely to see a shift on that front. After all, the bank continues to reinvest the bonds upon maturity.

The one area of interest lies in the possibility of a new targeted longer-term refinancing operation (TLTRO) programme, with calls for another round of liquidity for banks to help stave off the current slowdown. However, with many banks finding liquidity easy to find, such a measure would clearly be aimed as a fix for Italian banks in particular, which makes such a move less likely.

ECB announcement: what should traders look for?

With the wider hawkish outlook now shifting towards the middle in response to shifting economic factors, traders should be looking out for any marginal shifts in tone rather than any big announcements. The possibility of a third TLTRO in the forthcoming meetings should not necessarily be ruled out, and such a move would be seen as providing greater stability for the eurozone financial system.

As usual, the euro will be a key barometer for markets, with the deterioration we are currently seeing providing a clue that markets are looking for a possible dovish shift from the meeting. The wider creation of lower highs and lower lows highlights the possibility of another bearish shift coming into play from here, with a break below $1.1234 maintaining that trend. Watch for the breakout from the current pennant formation to provide a short-term outlook, where an hourly close below $1.1309 provides a bearish continuation signal.