Last Meeting
The March ECB meeting was a pivotal affair which saw the central bank initiate a wave of new measures designed to combat low inflation in the Eurozone economy.
Expectations were aligned around a 10bps cut to the deposit rate and some technical adjustments to the Bank’s QE program. New measures announced included a 10bps cut in the deposit rate, a 5bps cut in the refinancing rate and a 5bps cut in the marginal lending facility rate, alongside adjustments to QE which include increasing the size of purchases to 80 billion euros per month, an increase of over 30%, as well as increasing the range of assets available to purchase. Assets available for purchase as part of QE will now include non-bank corporate bonds.
Also announced was a series of four Targeted Long-Term Refinancing Operations to be launched in June, each with a maturity of four years. The TLTROs are an especially interesting step and highlight the determination of the ECB. The payments will effectively act as a subsidy for Banks taking up the money, balancing out negative deposit rates. For those banks whose net lending surpasses a benchmark, the rate of the TLTRO could be as low as the deposit rate.
Data and Developments Since
Eurozone data since the ECB’s last meeting has had a mildly positive skew with a few notable developments, such as an unexpected uptick in inflation both in February and March and positive momentum in PMI data sets.
Positive data
Eurozone Feb CPI beat expectations
Eurozone March Services and Composite PMIs beat expectations
Eurozone Mar CPI beat expectations
Negative data
Eurozone Feb Industrial Production missed undershot expectations
Alongside these monthly data points we’ve also had a raft of comments from various ECB members. Of note were comments made by ECB’s Praet, who outlined the risk that low inflation might become persistent and deeply damage the economy, ECB’s Mersch, who noted that the ECB’s “target objective” was not the euro exchange rate and warned against so called currency wars, and also ECB chief Mario Draghi who once again reiterated the bank’s willingness to do whatever necessary to combat low inflation.
Expectations For This Meeting
With the ECB’s new measures having only been in effect for one month, traders are not expecting a great deal out of the ECB tomorrow, though will be looking for further detail on some of the measures announced, especially regarding the corporate sector purchase program which is stated to start before the end of q2 2016. Of particular note also will be the ECB’s rate outlook. Adverse moves were triggered last time around when Mario Draghi commented that he saw further rate cuts at coming meetings as unlikely, and with EUR having remained firm since that meeting, the ECB chief will likely be seeking to avoid providing a catalyst for further strength.
Regarding the economic environment, there hasn’t been enough of a change to provoke a reaction from the ECB, though with inflation having actually improved slightly over the last two months it is likely that this meeting will take a less desperate tone, though no doubt the same mantras will be used pertaining to the ECB’s extensive arsenal and willingness to act further if necessary.
Trade Ideas
Not expecting tomorrow’s event to yield much in the way of volatility, but there are some areas on EUR/USD I would be interested in trading if we see them. Price failed today at a retest of the broken bullish trend line from mid-March, which is also key structural resistance (February high), suggesting a turn lower is instore. If we break below the last support at 1.1233, look for shorts either using the breakout or a retest of the level from below. To the topside then, if we reclaim that 1.374 handle and break above the February high, play a topside breakout.