Ahead of the ECB announcement this week, WU Business prepared an Outlook guide preparing for possible implications this may have for businesses with Euro exposures Have a look at our Euro Outlook guide in preparation for ECB announcement this week.

1. ASSESSING
THE OUTLOOK
FOR THE EURO
THIS IS
Helping you make the right currency
decisions with better insights
RISK MANAGEMENT
This document is a financial promotion and has been prepared and approved by Western Union International Bank GmbH, UK Branch. The information contained within this document does not constitute financial advice or a
financial recommendation. The information set out in this document is general in nature and has been prepared without taking into account your objectives, financial situation or needs. The Western Union Company provides
its Foreign Exchange Options services in the UK through Western Union’s wholly-owned subsidiary, Western Union International Bank GmbH, UK Branch (WUIB).

2. 0.2%
0.1%
0.0%
-0.1%
-0.2%
-0.3%
-0.4%
$1.4500
$1.4000
$1.3500
$1.3000
$1.2500
$1.2000
$1.1500
$1.1000
$1.0500
Jul 14 Jul 15 Jul 16 Jul 17
ECB bank deposit rate EUR/USD exchange rate
June 2014
ECB cuts rates into negative
for the first time in history
March 2015
ECB officially launches QE programme
Spring 2017
ECB hints about potential QE taper
Sep 07, 2017
ECB decision on QE
Since 2014 the Euro has been anchored around historically low levels as a result of the European Central Bank’s (ECB) unconventional monetary policies. The ECB cut
interest rates into negative in 2014 and has since pumped over 2 trillion Euros into financial markets using measures such as Quantitative Easing (QE) in order to fight
deflation and boost Eurozone economic growth.
However, a new chapter seems to have emerged in 2017, and the Euro is now the best performing currency of the year. Robust growth means ECB President, Mario
Draghi, recently suggested that the ECB could soon start to reduce its QE programme, and many are speculating that this reduction in QE will be announced as early as
the central bank’s next meeting on September 7th
.
So what happens if the ECB does make such an announcement in September, and what kind of market volatility could this trigger? To help you make an assessment
ahead of this event risk, and take appropriate action around your currency exposures, here is our guide to September’s ECB announcement and the outlook for the Euro.
2014 to 2015: ECB’s interest rate cuts
and QE policy contributed to a 25%
decline in the EUR/USD exchange rate.
Aug 2017: Euro has surged by over
12% since April 2017 amid bets
the ECB will begin to taper its QE
programme as early as Sep 07.
Sep 2017: will the ECB’s next policy
decision turn out to be a ‘non-event’,
or will a decision on QE trigger a major
shift in the Euro?
Source: Reuters, ECB, Western Union – August 24, 2017
September’s ECB announcement – why it matters
Are we witnessing a major turn in the Euro?
ECB MEETING
SEPTEMBER 2017

3. Bets in favour of the Euro – highest since 2011
QE is designed to stimulate an economy, therefore President Draghi’s comments about potentially reducing QE emphasises the marked economic
recovery that we’ve seen in the Eurozone this year. It’s also a key factor behind the Euro’s recent sharp appreciation to its strongest levels in over
2½-years against the US dollar (above $1.19), and to its strongest since 2009 against Sterling (below €1.08).
The chart below displays the Euro/US dollar exchange rate alongside ‘market positioning’ (net long Euro positions), which simply tells us how many FX
traders are predicting a rise or a fall in the exchange rate at any given point. You will see on the chart that ahead of the ECB’s September meeting, the
amount of traders currently betting on Euro appreciation against the US dollar (net long Euro positions) is at its highest level since May 2011.
Source: CFTC, Reuters, Western Union – August 24, 2017
15
10
5
0
-5
-10
-15
-20
-25
$1.1800
$1.1600
$1.1400
$1.1200
$1.1000
$1.0800
$1.0600
$1.0400
Net long Euro positions Vs. USD EUR/USD exchange rate
EUR/USD exchange rate – risen by over 12%
since April and now trading near 2½ year highs.
Net long Euro positions (amount of bets in favour of the
Euro appreciating Vs. USD) – highest since May 2011
Feb 16 May 16 Aug 16 Nov 16Nov 15 Feb 17 May 17
Euro surges as investors anticipate QE taper
Since April’s ‘Euro-friendly’
French election result, the
Euro has appreciated by
over 12% against the US
dollar. The EUR/USD
rate reached $1.1963
on August 28 – its
highest level since
January 2015.
ECB MEETING
SEPTEMBER 2017

4. 51 economists surveyed by Reuters between July 10 and 13, 2017. Source: Reuters, Western Union – July 2017
Draghi sets up September’s meeting as an event risk for Euro
ECB President Draghi discussed the Eurozone’s economic outlook and unexpectedly said that “deflationary forces have [now] been
replaced by reflationary ones”. Mr Draghi’s ‘hawkish’ shift has been spurred by a robust economic recovery and political stability
following the French election result.
Mr Draghi then said the ECB will make a decision on QE “in the autumn”, with policy announcements due on both September 7th
and October 26th
. The Euro has strengthened substantially over the summer because should the ECB start to reduce its QE stimulus
measures, then the next logical step would be for it to consider raising interest rates at some point in the future.
60%
50%
40%
30%
20%
10%
0%
Reuters Economists Survey (10-13 July): What will the ECB announce in September?
Announce a tapering
Extend QE at a
reduced pace
No change – it will be
decided in October
No guidance change
47%
25%
18%
10%
47% of economists favour September move
June 27:
July 20:
According to a Reuters poll released in July,
47% of the economists surveyed expect the
ECB will signal the start of QE tapering in
September. 28% believe nothing will change in
September or that a decision later in October is
more probable.
ECB MEETING
SEPTEMBER 2017

5. Inflation is still far
below its 2% goal
Even though core inflation in the Eurozone
reached a four-year high of 1.3% in July, it
remains far below the 2.0% long-term target
set by the ECB. Subdued growth of wages
in the Eurozone and low global energy prices
appear to be hindering a sharper rise in
inflation levels.
Euro strength a threat
to the recovery?
A sudden and large Euro appreciation could
become a burden for European exporters
by making products less competitive. Euro
appreciation would also limit Europe’s ability
to directly import inflation through a weak
currency.
Italian election
is still a risk
Euro-fragmentation fears could return in 2018
during the Italian General Election. According
to recent opinion polls, the Eurosceptic 5 Star
Movement remains a serious contender to
win the election which is due to be scheduled
before May 2018.
Issues still facing the ECBCould the ECB wrong-foot market expectations?
Since many investors now expect the ECB to reduce QE, September’s meeting could turn out to be a
major disappointment. It’s important to consider that if the ECB does not match these expectations,
there could be a severe market correction and a weaker Euro.
Here are reasons why the central bank could choose not to reduce QE in September, or even extend
the duration of the current QE stimulus programme well into 2018.
2.2%
2.0%
1.8%
1.6%
1.4%
1.2%
1.0%
0.8%
0.6%
0.4%
Eurozone Core CPI
(% y/y)
ECB's inflation target is 2.0%
Jun 2014
ECB cuts interest rates
into negative
Mar 2015
ECB launches QE
Jul 2017
Highest inflation in 4 years
but still short of 2% goal
2012 2013 2014 2015 2016 2017
Record low inflation (0.6%)
The ECB is still short of meeting its inflation target. It could therefore decide that more QE stimulus
is still needed for longer.
The ECB is still not meeting its inflation target
Source: Reuters, Eurostat, Western Union – August 24, 2017
ECB MEETING
SEPTEMBER 2017

6. ECB scenario matrix
SCENARIO 1 – HAWKISH SCENARIO 2 – NEUTRAL SCENARIO 3 – DOVISH
ECB decision taken on Sep 7th
Decide to taper QE Tapering hints No decision made
What does this mean?
• Detailed plan to start reducing
QE stimulus programme
• Confidence in the strength of the
Eurozone’s economic recovery
• Signals that a decision on extending
or reducing QE is being discussed
• Officials require more time to assess
Eurozone inflation outlook
• QE programme has a deadline
of Dec 2017, so ECB is in no rush
• ECB unclear on how to taper
QE without harming recovery
Market impact
Investors would feel
encouraged to continue
backing Euro gains
Mixed reaction but no
substantial FX market
impact
Disappointed investors
lead a sharp correction
lower in the Euro
Our ‘initial’ FX target ranges
EUR/USD $1.19 - $1.22
EUR/GBP £0.92 - £0.95
GBP/EUR €1.08 - €1.05
EUR/USD $1.19 - $1.17
EUR/GBP £0.92 - £0.90
GBP/EUR €1.10 - €1.08
EUR/USD $1.17 - $1.15
EUR/GBP £0.90 - £0.88
GBP/EUR €1.13 - €1.10
Although it is possible that September’s ECB decision does not lead to any substantial FX swings, the question for
businesses is what happens if it does? To help you assess the implications ECB monetary policy could have on the
outlook for the Euro and your business, here is our ECB Scenario Matrix and Euro forecasts compiled by our analyst team.
ECB Scenario Matrix – by Guillaume Dejean – Currency Strategist France, and Nawaz Ali – Currency Strategist UK (Aug 24th, 2017)
Important Considerations
Above matrix represents our
‘central case scenarios’ only,
based on analysis of ECB policy.
Other unknown international developments (e.g. US President
Donald Trump’s policies, geo-political risks) mean there are
potential outcomes which may fall outside of the above.
On Thursday September 07 the ECB will
announce its decision at 13:45 CET (-1 hrs for
BST) followed by a press conference at 14:30.
ECB MEETING
SEPTEMBER 2017

7. 2018 forecasts – latest Euro predictions
Source: Reuters FX Poll August 2017
Investec BNP
Paribas
Barclays Crédit
Suisse
Citi Deutsche
Bank
Société
Générale
Lloyds Allied
Irish
HSBCHSBC RBC Lloyds Société
Générale
Barclays Citi Crédit
Suisse
Morgan
Stanley
Bank of
America
Investec
$1.20
$1.15
$1.10
$1.05
$1.00
€1.15
€1.10
€1.05
€1.00
€0.95
$1.20
$1.07
$1.15
$1.13
$1.10
$1.20
$1.18
$1.09
$1.14
$1.17
€1.14
€1.10
€1.14
€1.10
€1.10
€1.09
€1.14
€1.12
€1.00
€1.10
EUR/USD GBP/EUR
Predictions submitted earlier this month highlight uncertainty about the ability of the Euro to appreciate much further beyond current levels. Perhaps a ‘dovish
ECB scenario’ in September will be the catalyst which leads to a market correction, and a rise in the GBP/EUR exchange rate. However, what if it doesn’t and,
given Brexit concerns, how low could the GBP/EUR rate potentially fall by 2018?
January 2018 predictions
The charts below display the divergence in forecasts from some of the world’s largest banks and expert currency analysts. If the GBP/EUR exchange rate
was trading at €1.14 or even parity (HSBC forecast) in six months’ time, have you estimated how these exchange rates would impact your profits?
ECB MEETING
SEPTEMBER 2017

8. Do you have a currency strategy?
Before September’s ECB meeting, it is important that you carry out an assessment of the possible currency scenarios which could impact your
future planning or hedging decisions.
ASSESS OUR
SCENARIO MATRIX
Understand how ECB policy
could impact exchange rates.
EXECUTE WITH
THE RIGHT TOOLS
Consider Market Orders to pro-actively
target or protect preferential rates.
Forwards
Options
Spot
Market Orders
1 2 3 4 5 6 7 8 9 10 11 12
400
300
200
100
You need to make
a €500,000 invoice
payment by October 01
If your exchange rate is €1.11,
(average rate Jul-Aug),
your payment would cost £450,450
However, if we see a ‘hawkish ECB
scenario’ on September 07, rates could
potentially fall to as low as €1.06
Should this materialise, you could
end up paying £471,698 for the
same invoice – £21,248 more
* Options are alternative hedging products that allow you to lock in a rate of exchange to protect your profits, and give you the ability to benefit if the market moves in your favour. There are disadvantages to consider
such as a slightly less favourable protection rate versus a comparable Forward, but please speak to our hedging experts to understand more about the costs and benefits which can vary with each Options product.
TAKE ACTION WITH THE
WU®
EDGE PLATFORM
The Volatility Slider Tool will help you
simulate these potential scenarios.
DEVELOP A
HEDGING STRATEGY
Choose the right products to help
mitigate your risks and protect profits.*
Consider this example of how currency fluctuations can impact a foreign invoice payment
ECB MEETING
SEPTEMBER 2017

9. * The cost of your call will vary depending on your network provider and it is likely that calls from mobile phones will cost considerably more. We strongly recommend that you check with your network provider for potential costs.
© 2017 Western Union Holdings, Inc. All rights reserved.
This document is a financial promotion and has been prepared and approved by Western Union International Bank GmbH, UK Branch. The information contained within this document does not constitute financial advice or a financial recommendation,
is general in nature and has been prepared without taking into account your objectives, financial situation or needs.
WesternUnionBusinessSolutionsisabusinessunitoftheWesternUnionCompanyandprovidesitsForeignExchangeOptionsservicesintheUKthroughWesternUnion’swholly-ownedsubsidiary,WesternUnionInternationalBankGmbH,UKBranch(WUIB).
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Vienna, Austria), which is licensed by the Austrian Financial Market Authority (Österreichische Finanzmarktaufsicht). WUIB is subject to limited regulation by the UK Financial Conduct Authority and Prudential Regulation Authority. Details about the
extent of WUIB’s regulation by the Financial Conduct Authority and Prudential Regulation Authority are available from WUIB on request.
This document has been prepared solely for informational purposes and does not in any way create any binding obligations on either party. Relations between you and Western Union Business Solutions shall be governed by the applicable terms and
conditions. No representations, warranties or conditions of any kind, express or implied, are made in this document.
Take action and assess your currency exposure before the ECB meeting
Currency volatility can have serious repercussions for your international business
Call us now: 0800 096 1225*
Email: ukdealers@westernunion.com
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