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ECB To Remain On Hold, Draghi's Words What Matter The Most

Published 07/21/2016, 06:03 AM
Updated 06/07/2021, 10:55 AM

After years of extraordinary monetary policy measures, the ECB is again under pressure to take more actions as the central bank meet for the first time post-Brexit vote. Although Brexit remains the biggest risk threatening Eurozone’s recovery, there are more challenges to be addressed when the central bank meets later today, such as the troubled Italian banks and the plunging yields on governments’ debt which makes it difficult for the ECB to pursue its €80 billion monthly debt purchases without amending the terms of their program.

Most developed economies central banks’ signaled more easing to come this summer, but with no fresh update on the status of the economy and only four months since the ECB implemented new measures by cutting rates 10 basis points and increasing their monthly QE purchases by €20 billion, I do not expect any new major actions to be taken at this meeting.

Mr. Draghi’s only tool is likely to be his dovish words on opening the door for further easing if economic conditions deteriorated, however, this might not be enough to send the Euro lower unless he provides clear guidance to markets on what the central bank may do in September when it releases its new economic forecasts. If he disappoints, the EUR/USD could climb towards 1.12.

News that Japan’s government is planning a ¥20 trillion package, twice what had been previously anticipated sent the Yen towards its lowest level since June 10. USD/JPY has rallied 700 pips in 9 trading days to trade above 107 during trading on Thursday. The rally came to an abrupt end after recent reports suggesting that the BoJ may be hesitant on introducing further easing next week, encouraged bearish investors to pounce. Although risk appetite and higher yields on U.S treasury bonds supported the earlier rally, further declines on the USD/JPY could be expected as optimism wanes over the BoJ taking any action amid the global uncertainty.

Sterling extended its yesterday’s gains as unemployment rate dropped to lowest levels in more than a decade and BoE’s survey showed no clear evidence of a slowing economic activity from the country's decision to leave the EU. This outlook is likely to be changed when Markit releases the one-off release of flash purchasing managers index on Friday. It will be the first leading indicator to provide a valuable assessment on the immediate impact post-referendum vote. On the data front today, U.K. retail sales is expected to drop -0.6% in June from 0.9% in May, a steeper decline would likely erase today’s gains.

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