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.

Tonight’s ECB:is this week’s main event as the market focuses on marginal changes in language with expectation that there will be further steps towards normalization. The ECB will express this by removing any reference that QE could be increased while signalling a data dependent view as each step is conditional leaving room for the ECB to be flexible with their implementation.

The trigger for a EUR correction is Draghi emphasizing a gradual approach or reference EUR strength. We would use this pullback to enter long EURJPY and EURGBP.A more hawkish outcome pushing EURUSD higher would be if Draghi confirms discussions of tapering in 2018 and/or ECB remove QE asymmetry from their statement.

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