ECB Draghi in Focus as Inflation Stalls in Europe

China stock market crisis, lower commodities and puzzling Fed complicates ECB’s inflation outlook

Reports out of China about the continuing sell off of equities and the crackdown of market manipulators by the Chinese government have keep volatility high and favored safe havens such as the Japanese Yen and the Euro. European data has supported the single currency as German confidence and good news out of Spain have appreciated the euro. The USD is caught in a loss of faith by the market regarding a September interest rate hike and the stock market crisis in Asia. The future monetary policy actions of the Federal Reserve remain a big question mark and uncertainty breeds volatility in such an unstable market.

The European Central Bank (ECB) President Mario Draghi will have a press conference on Thursday, September 3 at 8:30 am EDT. There are no surprises expected when the ECB announces its benchmark rate 45 minutes earlier as no change is the consensus from market watchers. There will be some questions around further quantitative easing but Mr. Draghi has reason to be confident around current levels of stimulus. The data supports a more patient central bank as preliminary inflation figure of 0.2% inline with expectations was published Monday. The ECB is expected to turn to verbal intervention, using rhetoric, before any changes to its monetary policy are implemented. Mario Drahi will address the macro headwinds facing the global economy, but is expected to highlight how the ECB is ready to act if it threatens European growth in the short term.

The rout in commodities and market turmoil have appreciated the euro, complicating the ECB’s goal of higher inflation. European inflation official forecasts have been anticipated to be revised downwards later this week as even though the price of oil has surged of late, there is still a considerable amount of supply with a shrinking demand for crude.

A big week for U.S. employment continues. The ADP private non farm employment report disappointed with a 190,000 new jobs slightly below the 204,000 expected. The Department of Labor will publish the U.S. unemployment claims Thursday at 8:30 am EDT. Jobless claims have been climbing, but overall the U.S. employment component continues to show resilience and that is why the Federal Reserve and the rest of the market are awaiting Friday’s non farm payroll (NFP) report published at 8:30 am on Friday, September 4. The U.S. economy has managed to record above 200,000 gains since the release on May 8 and an equal healthy figure is expected on Friday. The report will be heavily analyzed for signs of a strong recovery in all the components of employment and not just the top headline numbers like the unemployment rate and number of jobs. The quality of the jobs and the wage components should be more telling and could drive the USD higher. On the other hand a disappointing or mixed report will do the dollar no favors as if employment falters then the September rate hike will be off the table and the market will punish the USD.

Central banks around the world have struggled to contain the markets they shackled with coordinated monetary policy following the credit crisis of 2008. The side effects of those decisions cannot be ignored any longer as central banks begin to break rank with monetary policy and interest rate divergence on the rise. The ECB is writing another page in the book about failure of central banks to gain traction on the fight against deflation. The market many variables were easier to suppress with low rates and increased liquidity. Regaining investor confidence and getting consumers and corporations to spend, while vital parts of the needed virtuous cycle of economic growth, are not as easy to stimulate.

Forex market events to watch this week:

Thursday, Sep 3
7:45am EUR Minimum Bid Rate
8:30am EUR ECB Press Conference
8:30am USD Trade Balance
8:30am USD Unemployment Claims
10:00am USD ISM Non-Manufacturing PMI
Friday, Sep 4
8:10am USD FOMC Member Lacker Speaks
8:30am USD Non-Farm Employment Change

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza