ECB likely to change its monetary policy tune in 2018, says CIBC Capital Markets

The European Central Bank (ECB) is expected to change its monetary policy tune going into 2018, according to a recent report from CIBC Capital Markets. Political turmoil is heating up in a number of Eurozone countries. German coalition negotiations have collapsed, Catalonia has voted for independence and there’s a national poll set for Italy during the first half of 2018. That said, positive economic fundamentals should still lead the currency stronger next year. Consumer confidence across the region is hovering around levels not seen since 2001.

Forward-looking manufacturing PMIs are at seven-year highs. Growth in the region has also accelerated. These improvements, along with others, underline our view that there will be little reason for the ECB to extend its bond-buying program past September 2018.

So, even though central bankers have suggested rates will remain at current levels well past the ending of the asset purchase program, we expect the Governing Council to at least sound more hawkish by early 2018. Assuming political risks don’t materialize, that should gradually move the needle on both longer-term rates and the currency.

Widespread negative yields have prevented many key investors, including foreign central banks, from buying new euro-denominated paper, and even a turn to modestly positive yields would generate some rebalancing in the euro’s favor. We target a 1.22 euro by mid-year 2018.

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