UBS House View Daily

Thought of the day

14.07 - ECB signals line up

Since the sovereign yield shakeup following Draghi’s 27 June reflation remark, ECB officials have had to stay close to the line on policy or risk sparking more market volatility. This dynamic played out again in the last 24 hours, with dovish Rimsevics's comments on QE potentially lasting “a few years,” followed by reports Draghi plans to discuss exit plans at Jackson Hole next month.

But in spite of the mixed messaging, all signs suggest the ECB is on track to unveil normalization plans on 7 September:

  • The Eurozone economic backdrop supports an ECB exit, with a narrowing output gap and composite PMI still highly expansive at 55.7. Eurozone growth at 2.3% annualized in the first quarter outpaced the US by a wide margin.
  • A tightening labor market may yet spur strong inflation. Eurozone unemployment is at its lowest since 2009, and we expect it to reach full employment of 7.5%–8.5% in 18–24 months.
  • Finally, the ECB’s last experience withdrawing monetary stimulus suggests Draghi wouldn’t set down the path to tightening without certainty or resolve, bolstering the case for a slow and well-telegraphed move toward normalization.

So our base remains for the ECB to start tapering QE as of January 2018, with a first reduction in the monthly asset purchases from EUR 60bn to EUR 40bn. We maintain our EURUSD forecast at 1.16 and 1.18 in three and six months, respectively.

Chart of the day

ECB signals line up

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