All eyes on Draghi in next week’s ECB press conference

1st September 2015 By: Ranko Berich

ECB Press Conference – 03/09/15

The US Federal Reserve may have been the focus last week, but the market’s full attention will shift on Thursday, to how the ECB intends to address the looming deflationary shocks facing the eurozone.

Private sector credit has only just begun to improve in the eurozone and inflation has escaped several complete disasters. This is not the kind of environment that reacts well to price shocks, leaving the ECB in a tight spot. Any medium-term fall in core inflation will cast serious doubts on the central bank’s ability to meet its inflation target.

Draghi has shown that the ECB is willing to act quickly if it looks like medium-term inflation expectations are beginning to deteriorate. With this threat on the cards, this week’s inflation projections will be crucial to evaluating the outlook for monetary policy.

If the ECB believes recent shocks to commodity prices will have a substantial and lasting effect on inflation a second bout of QE will be increasingly likely. After a week of volatility and eventual gains for the euro, any discussion of an extension of the current QE programme has the potential to send the currency reeling.