ECB Should Delay Further Stimulus Until September

European equity markets are trading slightly in the red ahead of the ECB monetary policy announcement on Thursday and U.S. futures are pointing to a similar open on Wall Street.

Markets had been trading slightly higher earlier in the session but this was quickly undone by Haruhiko Kuroda as he rejected speculation that the Bank of Japan is considering helicopter money as a tool to deal with the inflation problem. It wasn’t just equity markets which came under pressure following these comments, the yen – which had weakened considerably over the last couple of weeks on the rumours – surged to around 105.50 against the dollar, and further upside could follow.

Investors will now look to the ECB for further monetary stimulus measures that will help support markets through these turbulent times, as well as of course, the eurozone economy. The ECB announced a big stimulus package back in March that has failed to deliver much in terms of inflation so far – of course it is still early days – and the euro is currently trading higher than it was prior to the “bazooka” as it has for most of the last four months.

With Brexit having heightened the downside risks to growth and inflation in the months ahead, many are expecting the ECB to respond with additional stimulus. This won’t be straight forward though as it’s still too soon to know exactly what the impact of the last batch was, not to mention that the ECB has already delved quite deep into its unconventional monetary policy arsenal and appears limited by what tools it has remaining that could have a material impact.

Will the ECB show a different hand?

With this in mind and considering that there will be little data available to support the need for new measures, I expect the ECB to follow in the footsteps of the Bank of England today and stand pat for now. It makes much more sense for it to wait until the September meeting when it will have access to more data as well as its latest round of economic projections.

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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.