European markets look set to open slightly higher this morning, helped by yet another record finish for the S&P500, and a decision by Chinese authorities to help underpin their economy by speeding up infrastructure spending on railways, while all eyes here remain fixed on this afternoon’s ECB meeting and press conference.
This week’s decline in EU inflation has once again increased calls for the ECB to outline further steps at easing monetary policy this week, particularly in light of Bundesbank President Jens Weidmann’s comments last week about the prospects of some form of QE. The shift in tone has been seized upon as evidence that the ECB might be on the brink of a seismic move in policy.
This seems highly unlikely judging by the reaction of the currency markets that quite rightly see it as more evidence of the ECB’s impotence when it comes to monetary policy compared to the US Fed and the Bank of England.
While current price pressures may well be weak, they are largely as a result of falling energy prices, which is not necessarily a bad thing, something a lot of commentators appear to be overlooking.
That’s not to say that there isn’t a deflation problem in Europe, there is, but there’s not much the ECB can do about it given the massive disparity in unit labour costs across the region.
The perception for now is that last week’s intervention by Weidmann is the latest attempt by the ECB to try and keep a lid on the current strength in the euro and nothing more, an attempt that was quickly undone by recent comments from Fed Chair Janet Yellen earlier this week, in an apparent clarification of remarks she made last week, when she reinforced the Feds commitment to extraordinary policy “for some time to come”, citing considerable spare capacity or “slack” in the US economy, as “taper” gives way to “slack” as the new buzzword in the global economy.
So what to expect for today given the current economic backdrop, as calls for further action increase.
The consensus still remains for rates to remain on hold, but it is slowly shifting to some form of action with some predicting a cut of 0.15% in the headline rate and a negative deposit rate. This still seems unlikely at this stage, and even if implemented would have little lasting effect after the surprise factor had been digested.
On the subject of a negative deposit rate, the implementation of such a measure could well do far more harm than good, particularly with so many European banks already struggling for profitability and looking to build up their balance sheets in preparation for the upcoming “Asset Quality Review” so that they can pass the ECB mandated stress tests due later this year.
While one might consider such a move it is hard to see how much difference it would make in the context of the current economic climate in Europe, which, while still weak remains more positive than negative on the economic activity front, unemployment notwithstanding.
When coming to a decision one should also consider last month’s economic assessment of conditions in the euro area, which pointed to consistent below target inflation, but no deflation threat, a stance reiterated by ECB President Draghi last week, where he once again compared the euro area to an “island of stability.”
This doesn’t sound like someone about to embark on further easing measures, particularly given that recent economic data continues to encourage, deflation concerns notwithstanding.
As such it will be Mr Draghi’s press conference that will dictate how markets move in the aftermath of today’s decision.
Furthermore, any action this week would be tantamount to admitting that last months newly announced growth and inflation forecasts, would probably need revising.
This week’s European manufacturing PMI’s were more good than bad and today’s services PMI’s are also expected to paint a similar picture, with Spain services PMI’s expected to show a modest improvement to 54.1, and Italian, French and German expected to stabilise around their February levels, well above 50.
EURUSD – dips in the euro are currently being contained by the 50 day MA with last weeks low at 1.3705 the key support. Only below 1.3700 argues for a move towards 1.3640 while below 1.3820. We need a break through the 1.3850 level to stabilise and suggest a retest of the recent highs at 1.3970. The 1.4000 level remains a key psychological barrier to a move towards 1.4200.
GBPUSD – the pound continues to trade in broad range with solid support between 1.6400 and 1.6500, and resistance near 1.6700. Support in the interim comes in around the 1.6570/80 area.
We have trend line resistance from the 1.6820 highs at 1.6740.
EURGBP – the downside remains intact with the next support around the March low at 0.8205. We could get a pullback towards 0.8340 in the interim though if we can’t push through the 0.8300 level. As such the bearish engulfing candle seen last week remains intact. The resistance at the 200 day MA at 0.8420 remains a key obstacle to further gains.
USDJPY – the US dollar continue to push on beyond 103.00 with the prospect of a retest of the previous highs of 105.50 a distinct possibility. Having pushed beyond the 103.70 level and March high, which is 61.8% retracement of the 105.50/100.75 down move, the 105.50 level remains a key barrier to further gains.
To reopen a move lower we need to see a move back 102.70.
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