The ECB meets this Wednesday and the market is expecting no policy changes in interest rates and forward guidance. This comes on the back of last month’s meeting where Mario Draghi showed more of his hand than expected and stunned markets by halting plans to normalise policy and delaying a rate increase until 2020. The subsequent growth shock and move lower in global bond yields with the US curve inversion and the German 10-year yield dropping below zero for the first time since 2016 will at least make for an interesting press conference at 12.30 GMT.
ECB Governing Council is split
The recent minutes for March’s meeting showed concerns about ongoing downside risks with growth expectations overly optimistic and that low growth would negatively impact on the ability to bring inflation back to the 2% target. There were also noticeable divergent views on the Governing Council with some arguing that guidance for steady rates should be pushed back into Q1 2020.
Downside risks remain
This month’s meeting should see the ECB reaffirm its recent assessment of the economic outlook, including the downside risks to activity from geopolitics and trade. As we mentioned in the Week Ahead, there have been some green shoots elsewhere in the wider global economy, but Eurozone macro indicators have been mixed. For example, core inflation dropped to 0.8% year-on-year in March, but we note there is considerable volatility around Easter so a rebound is expected from next month.
Low inflation expectations
In truth, it is a number of international developments which have also caused a shift in the ECB’s stance, including the Fed’s volte-face and Brexit risks. In turn, renewed concerns have re-emerged over disinflationary pressures and the related shift in long-term inflation expectations to near record lows. This has resulted in the interest rate markets scaling back chances of a rate hike, and even starting to price in a rate cut.
Too early for new measures
There is much chatter in the markets about new policies, but it is probably too early in our view for any announcements on additional easing measures at this meeting. We think June, when the new ECB staff forecasts are published, is the most likely time to announce more details on the new financing operation (TLTRO-III), while tiering could come in September, though only if conditions deteriorate further. This latter new initiative is especially important for traders as it will effectively signal lower rates for longer, which would see strong selling in the single currency.
Mario Draghi will no doubt face questions on these topics during the press conference, so market participants will be hanging on his words for any hint at the timing and finer details of these measures.
Impact on EUR/USD
The market is already pricing in a negative outlook for the Eurozone with the small chance of a rate cut. So it seems the bar is relatively high for Draghi to surprise the euro negatively. In which light, risk/reward points to a slightly higher single currency, especially as we are in what looks like a corrective recovery phase now having bounced off structural lows. Near-term resistance is now at 1.1290/1.13, ahead of 1.1420/50. Fibonacci levels have assumed strong significance over the last few months in EUR/USD and the euro should remain underpinned above 1.1200, with 1.1187 acting as very strong support.
Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warrant that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, the author does not guarantee its accuracy or completeness, nor does the author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
The trading of Foreign Exchange, and other leveraged products involves significant risk of loss and is not suitable for all investors. Increasing leverage increases risk. Before deciding to trade forex, commodity or Index based CFDs you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that Capital Index (UK) Ltd is not rendering investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters.