European Open – BoE, Fed and ECBs ELA in Focus

European indices are expected to pare yesterday’s gains early in the session on Wednesday having received no real direction from Wall Street or Asia overnight. Investors are also eyeing minutes from the latest Bank of England and Federal Reserve meetings today, as well as the latest European Central Bank decision on its emergency liquidity assistance program, which may weigh on risk appetite a little.

I’m not expecting much from the BoE minutes this month. Last week’s meeting was followed a couple of days later by the release of the inflation report and a press conference, anything we would normally rely on today’s minutes for we probably learned last Wednesday.

BoE Governor Mark Carney made it perfectly clear that based on the banks new forecasts, interest rates would likely rise in the middle of next year. I can’t think of what the minutes would contain that would make people doubt that. Not even think a couple of votes in favour of a hike from Ian McCafferty and Martin Weale should change people’s views on that hike as they have supported it on numerous occasions in the past to no avail.

The FOMC minutes on the other hand should be interesting as people’s views on its first hike differ greatly. Fed Chair Janet Yellen has repeatedly claimed that any hike will be data dependent while not explicitly specifying which data they’re looking for improvement from, which has led to many different views depending on the data people follow.

Labour market figures, for example, suggest the rate hike should come soon. Strong job creation, low unemployment, low new jobless claims and decent wage growth point to a strong enough economy. Retail sales on the other hand have been weak despite lower oil prices which suggests the consumer is clearly not feeling the benefit of this apparent recovery. Today’s minutes could shed further light on the Fed’s view, with them previously having taken a more hawkish stance, referring to the first quarter weakness as transitory.

The ECB will today decide whether it will apply haircuts on debt it will accept from Greek banks under its ELA program which would put enormous pressure on the institutions that are currently reliant on these loans to stay afloat. The ECB will not risk a meltdown of Greek banks, but they could apply enough of a haircut to pile further pressure on Greek officials trying to achieve a favourable cash for reform deal with the country’s creditors.

Greece is believed to have two weeks before it runs out of cash and defaults, with its next large payment on 5 May probably marking the day when this would happen. The ECB may opt to crank the pressure up as the deadline approaches, backing Alexis Tsipras into a corner and forcing him to accept an unfavourable deal in order to avoid a disastrous financial crisis in the country. Personally, I doubt the ECB will do this as it would raise serious questions about its independence with people already suggesting it is becoming increasingly involved in political affairs.

The FTSE is expected to open 2 points higher, the CAC 27 points lower and the DAX 56 points lower.

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Craig Erlam
Based in London, England, Craig Erlam joined OANDA in 2015 as a Market Analyst. With more than five years' experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while conducting macroeconomic commentary. He has been published by The Financial Times, Reuters, the BBC and The Telegraph, and he also appears regularly as a guest commentator on Bloomberg TV, CNBC, FOX Business and BNN. Craig holds a full membership to the Society of Technical Analysts and he is recognized as a Certified Financial Technician by the International Federation of Technical Analysts.