It’s already been a busy week in the markets with plenty of high quality economic data being released, a rate cut from the People’s Bank of China and an attempt by the Saudi’s to hike oil prices. And yet, trading volumes have been fairly depressed because the only two events that investors really care about this week are the ECB press conference – very unlikely that we’ll see any change in rates when announced 45 minutes before – and Friday’s US jobs report.
Well the wait is over, the ECB will announce its latest policy decision at 12.45 (UK time) and the press conference will begin 45 minutes later. Despite its new quantitative easing program being announced at the meeting in January, the details are yet to be released and as a result, traders appear to have held back a little in their selling of the euro a purchase of eurozone bonds.
In the last 24 hours, the euro has seen some heavy selling again taking it to an 11-year low against the dollar. This is not typically the behaviour of a currency that has QE priced in. With that in mind, there appears to be plenty of room for it to fall yet and no one is better at talking a currency down than ECB President Mario Draghi. There has been an increasing number of people calling for parity in EURUSD, some say by the end of the year.
That said, while some details of the program will be released such as what exactly the ECB plans to buy, I struggle to see exactly what people are looking for that would change their view on the euro. We know the size of the monthly purchases, we know the target balance sheet increase, we know it’s open ended and we know what the desired effects will be. What’s more, there have been improvements in the economic data recently and inflation improved last month from -0.6% to -0.3%.
In order to get further weakness in the euro during this meeting, Draghi will need to be very pessimistic despite the recent improvements, focusing on the downside risks that lay ahead. The new forecasts for growth and inflation could also be key and a downward revision in both could be sufficient to spark more selling. It may help that in December the ECB forecast 0.7% inflation this year and 1.3% next. Given the current deflationary environment, even with its new QE program, that would be asking an awful lot.
While the reason behind further euro weakness today may be difficult to understand, there certainly appears to be that bias in the market and as we’ve seen on numerous occasions with meetings of this kind, traders hear what they want to hear.