24.10.201900:39 Forex Analysis & Reviews: Seeing off to retirement: what to expect from the October meeting of the ECB?

The last ECB meeting on October 23 will be headed by Mario Draghi. His 8-year cadence is ending, and in December, Christine Lagarde will take over the post of head of the European Central Bank. Over the past few weeks, there has not been a debate among experts regarding the further actions of the European regulator: according to some analysts, Draghi will not finally change anything, maintaining a wait-and-see attitude. Others are convinced that he, on the contrary, will leave "loudly slamming the door", declaring the need for additional stimulation. Despite a certain intrigue in this matter, the debate is only about how soft the "Super Mario" will take at its last meeting. Moreover, even the most ardent optimists among traders exclude the option of hawkish rhetoric.

It is worth noting that Draghi is leaving his post at a very difficult time: the economic situation in the eurozone is deteriorating again, inflation indicators are slowing, and global and local trade conflicts are far from being resolved. The issue of Brexit also keeps European investors "on their toes": PMI, ZEW, IFO indices have been showing negative dynamics for several months. Key macroeconomic indicators also leave much to be desired.

Thus, the overall consumer price index in the eurozone last week was unexpectedly revised downward: according to new data, in September, the indicator came out at the level of 0.8% (the initial estimate of growth was 1%). Core inflation remained at the one percent level. German inflation also disappointed: the overall CPI in annual terms continued a downward movement, reaching the level of 1.2% (with growth forecast to 1.3%), while in monthly terms the indicator came out at zero, adding to the negative picture. The harmonized consumer price index was also disappointing – both in monthly and annual terms, the indicator came out in the red zone, falling short of the forecast values. In general, the locomotive of the European economy is of particular concern in recent years – for example, the September index of business activity in the manufacturing sector of Germany plunged to a record low - up to -41 points. In fact, Germany was on the verge of recession, although officials from Berlin deny such fears. By the way, Mario Draghi warned a month ago that the steady decline in the manufacturing sector risks spreading to other areas. Since then, the situation in the sphere of industrial production has only worsened.

All this suggests that further easing of the ECB's monetary policy is still on the agenda. Despite a certain split in the camp of the European Central Bank, most traders are confident that the regulator in the end will not be limited to the measures adopted in September. In this context, the position of Mario Draghi is not as important than Christine Lagarde's stance. Let me remind you that not so long ago she commented on her vision of the situation in two ways. On the one hand, she acknowledged that further easing of monetary policy could adversely affect the banking sector and financial stability in general. On the other hand, Lagarde stated that she "does not believe" that the ECB has set an effective lower limit for interest rates.

Here we can recall the position of European Central Bank Chief Economist Philip lane who is rumored to have a strong influence on Lagarde. He said that the ECB has not yet approached the limit of reducing the deposit rate, that is, this indicator has not reached the level that would damage lending. Lane said that in some other countries there are "lower negative rates" (apparently, he meant Switzerland), so the ECB in this context has not yet reached the technical limit. Given this rhetoric, we can assume that the next steps of the European regulator will be in the direction of easing, even despite the existing split in the ECB camp.

However, all these events are more distant prospects. In my opinion, the October meeting will be mostly "passing". Mario Draghi will surely defend the correctness of the course taken, allowing for the option of additional stimulation - but his words will be considered by the market through the prism of an early resignation, so the reaction of the euro will probably be muffled. In addition, supporters of the ECB's wait-and-see attitude say that the available arsenal of leverage is still limited, and in the event of a global recession, the regulator will not have room for the necessary maneuver.

Thus, Mario Draghi, most likely, at the October meeting will indeed take a dovish position, given the dynamics of key macroeconomic indicators in Germany and the eurozone as a whole. But this fact is unlikely to have a strong impact on the euro-dollar pair: the future fate of monetary policy is actually in the hands of Christine Lagarde, who will announce her first decisions as the head of the central bank in early December.