ECB meeting is main risk for higher FX volatility heading into year-end - MUFG

Lee Hardman, Currency Analyst at MUFG, expects that the ECB policy meeting will be important for the FX market as it will provide an update on the outlook for their QE programme.

Key Quotes

“We see risks as skewed to the upside for the euro from today’s ECB policy meeting. The euro could potentially strengthen materially if the ECB tapers QE prematurely lowering inflation expectations in the euro-zone and lifting real yields. It would also risk throwing more fuel on the fire ahead the upcoming elections in Europe thereby increasing the risk of sharper bond market sell offs.”

“Recent speculation that Italy is heading towards early elections after the constitutional court has ruled on the updated electoral law on the 24th January could potentially heighten European political risk further in the first half of next year. After taking these risks into consideration, we believe that the ECB should hold off from tapering QE until later next year. If we are correct, a continuation of ECB policy status quo should help to keep the euro weak.”