After a decent start to the week, European markets have undergone a sharp change in sentiment the past two days with the DAX falling sharply to a one-month low yesterday, and US markets also suffering a little bit of a crisis of confidence, although the losses there have been modest thus far.
It’s been notable that some of the bullishness of August is now giving way to speculation as to how much central banks can ease back on current levels of stimulus in an economic environment that is already starting to show signs of slowing.
Today’s European open looks set to be a negative one, on the back of yesterday’s weaker US close and weakness in Asia markets this morning.
This leads us to today’s European Central Bank rate meeting amidst speculation that the bank will be the first of the major central banks to announce the start of tapering to its asset purchase program.
Given the current environment this seems highly optimistic and begs the question as to whether its remotely credible for the European Central Bank to be even considering tapering its asset purchase program at a time when economic growth in the global economy, and Europe is starting to show signs of slowing?
From the price action of the last couple of days in bond and equity markets there are some who clearly think so, and while in the case of the Federal Reserve, one can make a case for easing back on the accelerator by the end of the year, it’s hard to make a similar case in Europe.
It is true that headline CPI shot up to 3% in the August flash numbers earlier this month, and a ten year high, however core CPI is much lower at 1.6%, and has generally been a much more accurate reflection of EU inflation over the past ten years.
There is certainly growing disquiet about the bank’s various asset purchase programs, however that’s not really anything new, and while the hawks will no doubt make a lot of noise, as they always have, it is highly unlikely that anything tangible will come from today’s meeting, even more so ahead of the German election which is due on 26th September.
Furthermore, ECB President Christine Lagarde went to great lengths in July to make the case for the change of mandate, to allow the central bank to tolerate temporary inflation overshoots to its policy target, and in turn prevent policy mistakes of the kind that saw the ECB raise rates in 2008 and 2011. Now no one is suggesting that is what is going to happen here, but it would be a strange kind of message to send considering that change, if the ECB were to taper at the first sign of a big jump in CPI that is quite likely to be transient.
The ECB currently sees €80bn a month of bonds purchased every month under the PEPP, and which is due to run until the end of March 2022. It’s unlikely to change that amount given the current economic backdrop, though there are some who suggest we might see a reduction to €60bn.
This would be a risk given the rise we’ve already seen this week in yields across the bloc, and for that reason it might be wiser to wait until December.
EURUSD – found support at the 1.1800 area and 50-day MA yesterday. A break below 1.1800 opens the 1.1750 area and previous lows at 1.1660. Resistance remains at the 1.1910 area.
GBPUSD – rebounded from the 1.3725 area but needs to push back and hold above 1.3780 to signal a return to the 1.3900 area and the highs last week.
EURGBP – continues to find the air a little thin above the 0.8610 area, but needs to push back below the 0.8550 area, to target a return to 0.8520. Above 0.8610, targets the 0.8640 level.
USDJPY – still struggling below 110.50, however it’s not really going anywhere for the moment. If we can hold above 110.00, then the 111.00 is feasible. Below 110.00, retargets the 109.10 area.