ECB Sign Posts Next Meet?

All the Euro action seemed to be taking place Down under over the past few days. The ECB’s Draghi signaled this weekend that next month’s highly anticipated policy meeting could be the one – the one “critical in determining whether the ECB will provide additional stimulus to shore up the nascent euro-zone economic recovery.” Draghi and fellow policy members will have by then all the necessary information gathered to collectively decide whether Euro-policy makers should be proactive or not when it comes to rates or the introduction of other innovative tools.

For market watchers, the fact that Draghi needs to mention it certainly goes a long way to emphasize the significance of the next month’s ECB March meeting. The proof is in the pudding – because Euro-policy makers are so early in mentioning something of this importance will likely boost market speculation that Euro-policy makers will cut rates at its next policy meeting next week. Inflation growth remains well below the ECB’s target for months, inciting fears of “deflation” – an issue that threatens consumer spending, wages, business profits and investment. In the March meeting, Draghi and company gets to release their 2016 inflation forecasts – a tad unusual is the “extended timeline” for Euro-policy makers. Already this month, the ECB held all of its key interest rates steady, and this despite annual euro-zone inflation at a low +0.7%, well below the ECB’s desired +2%.

The Capital Market is beginning to believe that Draghi and company may have sufficient grounds to lower interest rates or take on other stimulus measures if the ECB’s own inflation forecasts remain significantly below the target. The “persistent” weak price pressures are now becoming extended – appearing well into the medium term. All policy makers are willing to admit is that inflation remains anchored – however this does not dispel the possibility of deflation.

So far, general Central Bank monetary policy has been more about following the leader and that leader being the Fed. Until interest rate and policy makers begin to differentiate themselves, especially amongst the G7 policy makers, capital markets will have to withstand more of the same – a forex market handcuffed to monetary policy and price movements that are being dictated too by developed policy makers.

The EUR’s price range over the past two weeks would suggest that it’s still touch and go as to whether the ECB will take action next week. If they do happen to act it most likely fall into the initiatives that ends up adding liquidity. This could end the ECB’s sterilizing “the money process” – where they buy bonds and drain cash out of the front-end. This is having no impact on the money supply, but keeps longer-term rates lower. Draghi and company could introduce another longer-term refinancing operation – aimed at the financial centers lifting lending to the private sector.

So far, the 18-member single currency has show limited reaction whatsoever to the G20 2% plus global growth pledge, comments from ECB members themselves or Moody’s somewhat surprisingly upgrade of Spanish debt late last Friday. By this stage, the EUR should be performing a wee bit better. However, having forex ‘vols’ trading near record lows does not make the situation any easier.

The early Euro focus this week is January’s inflation confirmation. The data itself was mixed with a January fall of -1.1% in m/m prices versus a -0.3% return. The +0.8% annual rate just beats the ‘flash’ release for December. Dismissing the m/m change the annual price rate remains depressed and well below all policy makers targets. If you buy into the relative strength of the US economy and believe that the weather factor was anomalies when focusing on the Fed go-to job reports, then the USD’s dominance will be expected to pick-up.

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BoE Is The Leading Contender

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell