Another month, another pivotal central bank meeting
Today’s European Central Bank meeting is once again expected to see Mario Draghi and the Executive Council add stimulus to the economy via further cuts to an already negative deposit rate as well as upping the amount of assets it buys on a monthly basis.
Consensus sits at a cut of around 15bps to the already record low deposit rate and another EUR25-30bn of asset purchases and my expectations are broadly that, although I think that more good work could be done via a larger cut in rates.
The euro is the European Central Bank’s preferred transmission mechanism for dealing with its economic issues; lower euro means rising inflation and rejuvenated exports. Both sterling and the US dollar have had periods of weakness that has enabled them to deal with their own economic malaise and this is the turn of the euro. It stands out so much because of the divergence around rate expectations, the thoughts that the Federal Reserve and the Bank of England are getting closer to raising interest rates.
Can Mario be super?
There are doubts around today of course and most of them come stem from the level of expectations that the market has for Draghi and his bazooka. Every time we have doubted Draghi’s ability to beat expectations and knock the euro lower, he has come through. Today’s expectations are the highest that have ever been set and the press conference will have to do a lot of the heavy lifting in the absence of a stronger cut to the deposit rate than is forecast.
The decision is due at 12.45pm GMT with the press conference at 1.30pm.
Sterling starting to slump
Euro put on its dancing shoes yesterday and made some gains but the overnight moves have been quiet and we expect that to continue into the decision.
A lot of euro buying was seen against the pound yesterday following a poor construction PMI number. The poor data of the past two days has seen GBP/USD trip below the 1.50 level once more and take up ground that we haven’t seen since the pre-election wobbles. Thoughts that the Bank of England will hike rates soon after the Federal Reserve have taken a knock in the past 2 days as the differentials between US and UK debt on a 2 year time frame are starting to widen; the market is betting that rates will rise in the US but not so much in the UK.
A strong services PMI number from the UK could help matters this morning although anecdotal evidence from companies seem to suggest that recent spending patterns have been weak. A poor number will see the UK economy slumping into the New Year and further doubts emerge on the prospects for rate hikes.
Fed prepped for a fortnight
A speech from Janet Yellen overnight has cemented further the belief that the Fed will hike rates in just under a fortnight’s time. Language around future rate hikes depending on “actual progress” towards the Fed’s inflation target was taken as hawkish and the dollar has made a slight move higher overnight.
The Day Ahead
Before the ECB we obviously have PMIs from Europe to take into consideration with inflation and price components interesting to analyse given what Super Mario has planned for us.