In a note to clients, Citi outlines its preview for the ECB's September meeting on Thursday providing its expectations for EUR/USD reaction over the ECB statement/press conference.
1- Citi continues to believe that the ECB will likely stay on the side of caution, but policy will remain unchanged.
2- CITI economists see cuts to both the HICP and GDP forecasts – with the inflation numbers bearing the brunt of the adjustment on weaker oil and a stronger EUR. The bank expects the 2015 HICP mid-point to be lowered by 0.2pp (to 0.1%), 2016 HICP by 0.2pp (1.3%) and the 2017 HICP by 0.3pp (1.5%). For GDP, we see 2015 mid-point cut by 0.1pp to 1.4%, 2016 unchanged at 1.9%, and 2017 raised by 0.1pp to 2.1%," Citi projects.
3- Bottom Line: A dovish Draghi is consensus, but it is likely too early to see a follow through.Most economists expect forecasts to be lowered (especially inflation) and a dovish press conference, but in terms of new commitment or action, CITI suspects the market will be left short.
4- Directionally, this implies EUR will be sold over the statement/press conference, but with no significant adjustment to policy and NFP the following day, a commitment from traders should not be large. The bank expect EUR will probably be sold on the ECB forecasts/press conference, but bought back after. This leaves EUR/USD still range bound between 1.08-1.17.
5- Greater dislocation in EM FX will continue to pressure EURUSD higher. The potential of a Fed hike on 17 Sept will keep it from strengthening too much, Citi adds.