ECB's Dovish Shift: Markets Anticipate Softer Policy Guidance

EUR: Reports of a dovish ECB tilt

Just as the European Central Bank quiet period begins ahead of next week’s policy meeting, a media report published yesterday hinted at an ongoing shift in the Governing Council towards a softer tone when it comes to near-term policy guidance.  The report suggests that members are unlikely to repeat the recent strong guidance for the following meeting, and should refrain from committing to a hike or pause in September – effectively reverting to actual data-dependency. We would not be shocked to see this happen. We have heard a more moderate tone by some of the ECB’s most prominent hawks lately, and the ever-deteriorating eurozone activity outlook is definitely clashing against stubbornly hawkish rhetoric despite signs of sticky core inflation.

Still, markets appear reluctant to move on speculation and are probably looking back at the recent history of Lagarde’s hawkish press conferences. For now, they've preferred to keep expectations close to two rate hikes (43bp) as EUR/USD has held above 1.1200 thanks to the dollar’s still softish momentum. We still see room for the overvalued EUR/USD (in the short-term) to correct lower before the end of the week, with a move back to the 1.1150/1.1170 region as a first step.