Focus Shifts to ECB as Fed Lines Up March Hike

European equity markets are expected to start the week a little flat on Monday as investors look ahead to another busy week of economic data and central bank activity, including monetary policy decisions from the European Central Bank and the Reserve Bank of Australia.

For the last week or two, it’s very much the Federal Reserve that’s been front and centre, as policy makers queued up to warn that a rate hike is coming. We heard from four more policy makers on Friday including Chair Janet Yellen and vice Chair Stanley Fischer, both of whom stayed on message with Yellen being unusually explicit in claiming that a rate hike will likely be appropriate at the next meeting if the central bank determines the data is moving in line with expectations before stating that the employment goal is essential met and inflation moving closer to target.

So What’s Next

Fischer was also keen to stress that a conscious effort was being made by officials to move market expectations on a possible rate hike which, while being quite obvious, would be a bizarre acknowledgement if the central bank was to then opt against it. Investors are clearly of the same opinion as the probability of a hike next week ticked higher once more to almost 80%, well above the level needed for the Fed to be comfortable with hiking.

FedWatch

Source – CME Group FedWatch Tool

With the blackout period now upon us, no further commentary on the matter is likely leaving only the data – including Friday’s jobs report – to throw a possible spanner in the works, although I’d be very surprised if expectations dramatically change now given the effort to steer them this was from the Fed.

Instead the attention will likely shift to another central bank, the ECB, this week with it announcing its latest monetary policy decision on Thursday. With economic conditions improving in the eurozone – albeit as political risks increases – and headline inflation heading higher, the central bank could come under pressure soon to consider removing a little more accommodation and ease the pressure on its large balance sheet.

Week Ahead Jobs and Fedspeak to Guide Dollar

Policy makers have been keen to stress that a lot of the inflationary pressures that have driven headline CPI back towards target have been temporary, due to higher commodity prices and a weaker currency, in an attempt to ease any concern about near-term tightening. That said, while a near-term taper is unlikely, the central bank has already announced a reduction in its asset purchases and another at the end of the year now seems likely.

As far as today is concerned, we’ve got some low and medium tier data due out throughout the session and we’ll also hear from the newest member of the Bank of England Monetary Policy Committee, Charlotte Hogg.

For a look at all of today’s economic events, check out our economic calendar.

MS

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Craig Erlam

Craig Erlam

Senior Currency Analyst at OANDA
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 Wall Street Journal and The Telegraph, and he also appears regularly as a guest commentator on networks including Sky News, Bloomberg, CNBC and BBC. 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.