- ECB is likely to loosen its monetary policy at tomorrow’s meeting by cutting the deposit rate from -0.3% to -0.4% and sending refinancing rates into negative territory
- We firmly believe that this time Draghi will deliver exactly what the market expects with some fine tuning in terms of the bonds the European institution is going to buy
- Downside pressure on the EURUSD is fading as markets start to question the true nature of the monetary policy divergence. The Fed is definitely struggling to hike rates and for the first time negative interest rate have been discussed. However, we know this is not an option as Euro competitiveness would take the biggest hit in the event that markets further price in no rate hike this year.
- In advance of tomorrow’s meeting, we expect the pair to trade sideways but maintain our positive bias in the belief that Mario Draghi will deliver what the market already priced in
- We think it is likely that inflation forecasts will be lowered below 1% for 2016, while growth projections should also face a cut to 1.5% on continued global uncertainties and weaker global demand
- EUR/CHF: On the medium-term, the risk remains on the downside as traders adjust their positions ahead of Thursday’s ECB meeting
On Wednesday, the release of poor trade data from China heavily affected the European and US markets. The sell-off in equity was led by commodity and energy shares, which fell the most on the back of plummeting commodities. The West Texas Intermediate fell sharply yesterday, dropping as much as 5.90% amid renewed concerns about global growth. In Europe, the Euro Stoxx 600 fell the most amongst regional indices, falling 1.01%, while in the United Kingdom the Footsie 100 was down 0.92%. Across the Atlantic, shares have not been spared by the spreading risk-off sentiment: the S&P 500 was down 1.12%, while the Nasdaq fell 1.26%. It worth noticing that small capitalisations have paid the heaviest tribute as the Russell 2000 was down 2.40%. Unsurprisingly, most Asian regional equity indices were trading lower overnight, following the rest of the world. The Nikkei settles down 0.84%,. While the broader Topix was down 1.14%. In China, the Shanghai Composite slid 1.34%, while in Hong Kong the Hang Seng fell 0.21%.
On the FX market, the single currency lost ground against all G10 currencies, in anticipation of the ECB’s decision to further ease its monetary policy. The Japanese yen was the biggest winner, up 0.31% against the EUR. EUR/JPY is down 1.70% from a week ago as traders take shelter in the yen. On the downside, the low from February 29th at 122.09 remains the closest support, while on the upside the high from March 4th will act as resistance.
The single currency was also trading lower against the US dollar but the fall was less pronounced as investors become increasingly worried about the US economy’s ability to weather the current market turmoil and more specifically the ability of the Federal Reserve to deliver what it promised. EUR/USD lost momentum ahead of the ECB meeting and fell 0.25% overnight. Until the meeting we expect the pair to trade sideways but maintain our positive bias on the basis that Mario Draghi will deliver what the market has already priced in.
EUR/CHF returned above the 1.0950 threshold as traders realised that the upside surprise in inflation was a once-off. However, on the medium-term, the risk remains on the downside as traders adjust their positions ahead of Thursday’s ECB meeting.
**Yann Quelenn, market analyst: “Consensus is resoundingly clear. The ECB will loosen monetary policy at tomorrow’s meeting. The deposit rate should decline to -0.4% from -0.3% and there is a decent likelihood that the refinancing rate, currently stalling at 0.05%, will go into negative territory. Expectations for this meeting are very high. Of course there is still an element of fear that Mario Draghi will under deliver tomorrow like he did at the December meeting when the pace of QE was not increased above €60 billion-a-month.
It is important to remember that downside pressure on the EURUSD is fading as markets start to question the true nature of the monetary policy divergence. The Fed is definitely struggling to hike rates and for the first time negative interest rate have been discussed. However, as we know this is not an option as Euro competitiveness would take the biggest hit in the event that markets further price in no rate hike this year.
At tomorrow’s meeting we will be closely analysing any announcement concerning inflation. We believe that it is likely that inflation forecasts will be lowered below 1% for 2016, which is far from the ECB inflation target of 2%, while growth projection should also face a cut to 1.5% on continued global uncertainties and weaker global demand. We firmly believe that Draghi will deliver exactly what the market expects with some fine tuning in terms of the bonds the European institution is going to buy. However, there will be no major shocks for fear of adding further turmoil to the overall situation.”***
Today traders will be watching industrial and manufacturing production from UK; MBA mortgage application and wholesale inventories from the US; inflation report from Brazil; interest rate decision from the BoC; RBNZ governor Wheeler press conference on OCR.