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ECB to mull rate cut, but would it even make a difference.

CMC Markets

Europe’s markets look set to open slightly higher this morning against a backdrop of US investors obsessing about the weather and its effects on US economic data in December and January, markets in Europe will be looking ahead to today’s ECB rate meeting and trying to determine whether the ECB will reduce any of its main interest rates today. There has been speculation that the headline rate could well get cut from 0.25% to 0.1%, and while that could well happen no one seriously thinks that even if it did it would make much difference to economic conditions in Europe. Given that the inflation outlook hasn’t changed that much since last month, and short term borrowing rates aren’t particularly tight, Eonia is back below 0.15%, it would be certainly be interesting to hear what the thought processes were in the event rates are cut today. Analysts have been fixated on last week’s slightly weaker than expected flash CPI reading for the Eurozone which came in at 0.7%, dropping from 0.9%, however the core rate which excludes the more volatile elements like fuel prices remained unchanged at 0.8%. Furthermore most of the economic data seen so far this week, retail sales notwithstanding, has largely been better than expected, which could well stay the central banks hand until March. For all the calls for the ECB to cut rates a reduction would be a surprise given that throughout January a number of ECB members, including ECB President Draghi himself, have insisted that there was no deflation risk in Europe, though we could get “a prolonged period of low inflation”, so to suddenly reduce rates when core inflation is unchanged could raise the prospect that the ECB is concerned that the recent recovery could be starting to stutter. There doesn’t appear to be any evidence of that so far, so once again we could well be looking to the press conference for clues as to whether the ECB could be considering other measures like a new LTRO, which seems unlikely given banks are currently paying them back, or some form of lending scheme to help the private sector. The Bank of England is also set to meet today with no changes expected to policy. There is an outside chance of a statement, but given the quarterly inflation report is to be published next week, it seems more likely that any tweaks to guidance will be done then. In the US after yesterday’s ADP numbers came in slightly below expectations, attention turns to the latest weekly jobless claims which are expected to come in at 337k, slightly down from last weeks 348k. The US trade balance is also set to expand slightly in December to -$35.8bn from -$34.3bn, and while either of these numbers could prompt a short term response, any miss is unlikely to move the dial too much ahead of tomorrow’s employment report. If anything given both FOMC members Charles Plosser’s comments last night and Charles Evans the day before, it would take a massive miss on any of these numbers to push the Fed away from its stimulus exit strategy at the moment. In fact Plosser suggested an even faster exit strategy if the data improved as he expects it to over the coming months. EURUSD – the euro seems to have found a short term base at 1.3475/80, however the onus remains firmly towards the downside and a move towards 1.3300, with fairly strong resistance now sitting around the 1.3700 area. Last month’s bearish engulfing candle on the monthly charts suggests the bias has now shifted towards the downside, and a subsequent retest of the 1.3000 level. Long term trend line resistance remains at 1.3855 from the all-time highs at 1.6040 and ultimately this remains the key obstacle to a move through 1.4000. GBPUSD – the 1.6250 area and 100 day MA remains the last obstacle to a drop on the 1.6000 area. Resistance now comes in at 1.6350, then 1.6420 and the 50 day MA, but in order to stabilise we need to get back above 1.6510 argue for a retest of last month’s high. EURGBP – the 0.8330 level continues to cap the upside with a break targeting the 0.8380 level and trend line resistance from last August highs. On the downside we have support at 0.8260, and below that at our previous lows at the 0.8165 level. USDJPY – continues to find bids at the 100 80 level which has held three days in a row. We need to retake the 101.80 level to argue for a move back to the 103.00 area. below 100.80 suggests a move towards the 100.00 level and 200 day MA. Further losses remain the risk now, given the US dollar has posted its worst month since April 2012, and a bearish engulfing month. This would suggest we’ve seen the highs in the short term, and could be set for move towards 100.00 and 95.00. CMC Markets is an execution only provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

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