There is no doubt that ECB President Draghi has to deliver today at the ECB’s policy meeting. Back in October, he said that the bank were not in “wait and see” mode but “wait and assess”. This, together with other and subsequent comments, have been pivotal in pushing the downtrend on EURUSD in recent weeks. To do nothing would see a strong short squeeze on the single currency that would tighten monetary conditions, so the ECB seems to have little choice but to deliver. There is no single lever that the ECB can pull that will stem the deflationary threat within the Eurozone. Instead, the ECB looks set to deliver a package of measures to do the job, including a modest (10bp?) cut in the discount rate (already at 0.20%), alongside an extension and increase in the current QE program, due to expire in September of next year. As such, the one thing that is assured is further volatility on EURUSD.
Sticking with central banks, comments from Fed Chair Yellen late yesterday gave the market further assurance that the Fed is poised to tighten policy later this month, but also at a moderate pace. This meant that the dollar fell on her remarks, as she suggested that the pace of tightening moves next year would depend on “actual progress” in gains on inflation towards the Fed’s target. This fits with our feeling that the Fed will hike rates this month, but will indicate a modest pace of tightening thereafter, limiting the scope for further dollar gains into year end.