ECB shapes next moves (Afternoon analysis 06.06.2018)

Yesterday's Bloomberg reports on next week's discussion on ending quantitative easing and today's statements by ECB member Peter Praet clearly support the EUR/USD pair. The zloty stable before the MPC meeting.

The most important macro data (CET - Central European Time). Surveys of macro data are based on information from Bloomberg unless noted otherwise.

• 4.00 p.m.: Press conference after the Polish Monetary Policy Council's meeting.

ECB supports the EUR/USD pair

Yesterday afternoon, Bloomberg published a statement suggesting that perhaps next week's ECB meeting would discuss the date for ending the quantitative easing. Of course, this will not be communicated in mid-June. Also, it does not mean that the purchase of assets from October to September will be completed (the purchase is scheduled to amount to 30 billion USD a month and was announced a few months ago).

However, the fact that reduction in asset purchases is considered is positive for the European currency. Recently, the fear was expressed that the ECB might decide not to communicate rapidly the QEs due to the situation in Italy (therefore we can observe current increases in the EUR/USD pair, as these fears do not materialise). However, it is likely that the QE will not be completed from October and that the value of the monthly bond purchases will be reduced to 15 billion EUR per month. This type of limited buying-in may last until the end of the year. therefore, from 2019, the ECB will no longer purchase eurozone's debt instruments.

The discussion at the ECB's June meeting on the QE was confirmed by today's statements by Peter Praet, Chief Economist. The ECB's chief economist stated that "it is clear that next week's Board of Governors meeting will evaluate if the progress (concerning inflation) has been sufficient to gradually withdraw from asset purchases". The confirmation of Bloomberg's reports pushed the EUR/USD pair to around 1.1770 today, clearly (70-80 pips) above yesterday's opening.

However, support for the euro given by more mild policy may be confronted with another problem. Failure to buy assets could jeopardise the weakest links in the eurozone (including Italy). Therefore, the yields of Italy's Treasury bonds maturing in 10-years have reached about 3% again today, and have risen by 20 basis points to 1.2% for two years.

Currently, the market focuses more on monetary policy than on Italy's problems. However, if events in Italy cause a deceleration in the entire eurozone, the ECB will also have to take this into account. Therefore, interest rate increases may be delayed beyond the beginning of the second half of 2019 and the monetary tightening path will be extremely smooth. That is why today's optimism towards the EUR/USD pair may be exaggerated.

Stable zloty

As expected, the MPC has left interest rates unchanged. The press conference itself, after the Council meeting, can cause a little more excitement, but no major change in the communication is expected. All the time, keeping the loan cost unchanged in subsequent quarters remains to be the baseline scenario.

Reports related to the ECB do not act as a stimulus for significant changes in the EUR/PLN exchange rate. Polish monetary policy is to a large extent connected with the one conducted in Frankfurt, but the real changes in interest rates by the ECB are far ahead of us, therefore, the zloty's market should not value them at the moment. On the other hand, the dollar's quotations are slightly lower (the USD costs less than 3.65), but this is only the effect of changes in the EUR/USD pair. The next few hours, if no dramatic information appears, should be calm for the zloty.