- BoE non-event risk in pipeline
- Draghi’s headaches persist
- What’s the ECB’s minimum requirement?
- EUR expectations if disappointed
The threat of global central bank action is managing to keep the various assets classes moving. Whether it’s the Central Bank of Russia (tighter monetary policy next week?), the People’s Bank of China (easing of monetary policy?), the Bank of England (BoE), or the impending European Central Bank (ECB) rate announcement and press conference that takes place in a matter of hours, both traders and investors remain wary of unforeseen actions, or lack thereof, to initiate their early year-end exit strategies. Today’s ECB meet is really the next-to-last monetary event risk of the year. The Federal Open Market Committee is expected to go through the obligatory motions at its two-day meet later this month (December 16-17), while leaving the tougher announcements and clues for the new calendar year.
The BoE’s Expected Sideshows
Today’s BoE monetary meet is expected to be a non-event risk. Many are forecasting that GBP (£1.5671) will be unfazed by the announcement. Today’s focus lies across the English Channel with the ECB, and in particular Mario Draghi’s press conference after the obligatory rate announcement. The market will be looking for clues to solidify their EUR bearish convictions but the ECB president has become a dab hand at saying a lot without saying much.
The majority of the BoE’s Monetary Policy Committee’s (MPC) members are in no rush to raise U.K. interest rates, and it’s reason enough why the market expects Governor Mark Carney to keep the bank rate at +0.5%. Data this morning indicated that the U.K. housing market slowed further in November. The Halifax house price index, in the three months to November, rose by +0.7% from +0.9% the previous month. This is the fourth consecutive drop month-over-month since growth peaked last July. Carney and his team have been very transparent in forward guidance despite the dissent within the MPC. The market expects to be further briefed before there are any changes by the BoE, hence the anticipated sideshows.
Draghi’s Headaches Persist
The troubles at the ECB are far more delicate than most central banks can relate to, with every twitch, tick, and statement torn apart by capital markets seeking its own truth. Currently, the 18-member single unit continues to waddle within sight of its fresh two-year low outright (€1.2296), with investor expectations of further easing running “higher than normal.”
Nevertheless, Draghi and company are expected to leave rates on hold, but a growing consensus expects the ECB president to indicate that officials are moving closer to launching a wider range program of asset purchases. Regional eurozone bond yields have already managed to print new record lows this week in anticipation of looser monetary policy. Disappointing midweek eurozone business activity data prints egged them on. With euro economic recovery nearly non-existent, and coupled with the problems of falling inflation or the ongoing threat of deflation, has almost convinced everyone that the ECB’s back is against the wall. At some stage, sooner or later, the ECB will implement further expansionary measures. However, consensus tells us it’s not today.
The ECB’s Minimum Requirement
Investors are betting that a quantitative easing (QE) program or lookalike will continue to support regional bonds and equities, but many investors expect that the ECB will wait until next year before broadening its solution package. The danger is that the market may experience a quick deep asset price pullback if Draghi and company manage to be at least “less assertive” in their convictions. If that is the case, the ECB will lose a ton of street credibility in one single stroke.
The minimum requirement for Draghi today is to sound as dovish as he can while not actually announcing any more monetary easing — and make it sound convincing. The ECB indicated all along that it really wants to see the take-up at the mid-December TLTRO (targeted longer-term refinancing operation). Further ECB action will become much clearer if current measures and programs are not good enough to increase the ECB’s balance sheet. Failure will convince the ECB to act fast — perhaps by buying corporate bonds in early January, and implementing sovereign QE sooner than it had been anticipating (at the end of the first quarter or early second quarter, 2015).
Of EUR Expectations
The EUR currency bears own the upper hand as the market plays out the final few-weeks of this year. The single unit has managed to fall to a new 27-month low as it tests below €1.2300 ahead of Draghi’s highly touted press conference. Although the odds for full-blown QE have risen amid the weak growth outlook and the prospect of persistently low inflation, dealers note that Draghi needs to provide a very strong easing message in order to keep EUR/USD offered at this time.
From a technical perspective, the next key EUR low is at €1.2288 (June, 2012) and a break there managed to produce another two-cent drop to €1.2042 rather quickly. If the ECB were to add stimulus today the market will be expecting this as a minimum. Nevertheless, the current market bar for disappointment seems to be rather low. Upsetting the bear positions should be capable of triggering some conveniently “large” stop-losses just above the option protected €1.2400 handle. Any funny business from the ECB and the bears will try to shut the shop door to end the year despite U.S. nonfarm payrolls being on the horizon.