The European Central Bank (ECB) President Mario Draghi is expected to express concern over the recent appreciation in the common currency at the upcoming monetary policy meeting on September 7, explicitly mention that the stronger euro is the main reason the ECB has lowered its inflation projection and that there is further downside risk. That said, Draghi will still have some hawkishness in his tone. This is because growth momentum remains strong, which has previously been one of his arguments for why inflation will rise eventually.

A topic in the discussion is likely to be the economic and financial impact of the total stock of QE versus the effects of the monthly flow of the purchases, which was already attracting some attention in July, as revealed by the ECB minutes. Additionally, some ECB members have started to talk about the impact on the economy of the composition of the QE purchases and we expect this to be part of the discussions.

From a fixed income perspective a dovish ECB would be positive for the periphery relative to core, especially if the ECB continues its ‘silent’ but modest deviation from its capital key, where it buys more in, for example, Italy. Added to the ECB buying, a number of structural factors are long-term positive for the periphery (especially Spain and Portugal). However, Italy has not seen the same tightening as, for example, Spain given the political uncertainty and banking sector problems.

"Overall, we still believe the ECB will continue its QE purchases but at a reduced pace of EUR40 bln per month in H1 2018. We expect it to announce this at the next meeting in October but with some signalling of it at the upcoming September meeting. An argument for signalling a QE continuation should be a downward revision to the ECB’s inflation forecast. We expect a modest reduction to 1.2 percent in 2018 and 1.5 percent in 2019 (0.1pp lower both years) driven by the euro appreciation. Together with these small downward revisions, we expect Draghi to highlight further downside risk to the outlook due to the stronger euro," Danske Bank commented in its latest research report.

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