The ECB minutes of the meeting suggest their reluctance to change the monetary stance despite painting stronger inflation expectations, a decision we concur. We feel any early revisit on the monetary policy will result to a stronger euro against the USD even with the US Fed projected to raise rates three times in 2018 and each by 25bps. Our base case euro against the USD is 1.28-1.30 with room to reach as high as 1.35 against the USD. Too strong a euro against the USD will complicate the direction of inflation and export competitiveness, thus raising the risk of curtailing the central bank’s policy actions and dampening the economic performance, which in turn will cause some volatility in the global financial markets. For now we reiterate our view that the ECB will continue with its €30 billion bond purchasing programme under the €2.5tn quantitative easing programme which should end in September 2018, with rate hikes starting early 2019.

• ECB minutes reveals inflation which is the most important indicator is gaining momentum at a faster pace. With inflation expectations on the rise, it now suggests that the monetary stimulus could come to an end much earlier than we previously thought.

• While the minutes showed ECB will revisit its monetary policy "early this year", we concur with the central bank that it is too early to revisit. Looking at the ECB’s Survey of Professional Forecasters (SPF), inflation expectations for 2018, 2019 and 2020 was revised upwards from the previous survey by 0.1% to 1.5%, 1.7% and 1.8% respectively for 2018, 2019 and 2020.

• We feel any early revisit on the monetary policy will result to a stronger euro against the USD. The ECB has a larger scope to catch up and tighten its monetary policy, which means there is more room for the euro to be stronger against the USD, even with the US Fed projected to raise rates three times in 2018 and each by 25bps. Our base case euro against the USD is 1.28- 1.30 with room to reach as high as 1.35 against the USD.

• Too strong a euro against the USD will put a lid on the upwards movement of inflation. Besides, it will also hurt the export competitiveness. Hence, the risk of curtailing the central bank’s policy actions and dampening the economic performance will grow and thus causing some volatility in the global financial markets.

• Hence, for now we reiterate our view that the ECB will continue with its €30 billion bond purchasing programme under the €2.5tn quantitative easing programme which should end in September 2018, with rate hikes starting early 2019.

Source: AmInvest Research - 23 Feb 2018