Bottom line: We expect a relatively unchanged policy decision and for Draghi to give little insight into tapering specifics until the Fed’s Jackson Hole Conference prior to the September meeting where we expect the ECB to signal tapering to begin January 2018.
The ECB’s tolerance for further EUR appreciation will be tested tonight given the still relatively low inflation figures and a negative output gap. ECB research estimates that a 10% increase in euro NEER could depress Eurozone inflation by ≈0.5% over a 1 year period.
Positioning:Post French election EURUSD longs have been building at a rapid pace but have now reached extreme levels leaving room for a downside correction. Our main view is to use pullbacks as an opportunity to enter long and see tactical short EURAUD and EURJPY positions as most likely to benefit from a EUR correction.