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"Market focus will be on Draghi's first press conference after finding out about the Brexit vote.
Forecasts are not expected to be updated at this meeting so markets will have to wait until September until any change in policy but the tone will be closely watched. Inflation expectations as measured by the 5y5y swap have bounced to 1.35% from the lows of 1.25% last week but are still not expecting inflation to reach 2% for more than a decade. The ECB should be focused on financial market and banking stability which is addressed via LTRO facilities. Note that yesterday's release of the ECB Bank lending survey, while mostly done before the Brexit referendum, was quite upbeat about credit suggesting that LTROs had improved bank profitability. The equity markets may disagree, having fallen 17% since the March ECB meeting, but we do expect the ECB to acknowledge relatively calm market post the Brexit vote. Draghi could acknowledge that there will be business uncertainty after the Brexit vote, which if translates into lower growth and inflation, would require further easing
What would make EUR move lower?
If Draghi reverses his statement from March, now saying that interest rates could be cut further then it would weaken EURUSD on the day but only lastingly weaken the currency if there are expectations of more than a 20bp cut.
Suggestions of an extension of QE won't be able to weaken the EUR as further corporate bond purchases would not be able to bring down long term government bond yields sufficiently. Rates investors will be watching for any clues on how the ECB could tweak current government bond purchase programme rules to allow for any extension of QE without hitting bond availability limits, though this type of discussion could likely be left until the September meeting.
We are now forecasting EURUSD towards 1.18 by the end of this year and are still long EURGBP".
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