Welcome to our rolling coverage of today’s ECB Monetary Policy Meeting (12.45 GMT). Previews, live coverage and reaction below…
18.00 (GMT) ECB Review
The ECB’s January monetary policy meeting saw rates remain unchanged, as expected, though the press conference following the decision saw ECB president Mario Draghi delivering a message that was more Dovish than many expected.
Draghi noted that inflation is still well below the ECB’s target and that the expected 2016 inflation path is now significantly lower than projected in December due to continued declines in Oil prices. Downside risks to both inflation and growth were cited, with the slowdown in emerging markets listed as prominent among the contributing factors.
Draghi confirmed that the ECB will review its policy stance at their March meeting, stating that the Bank’s credibility would be harmed otherwise, and reiterated also the ECB’s willingness to act, saying that there were “no limits” to how far they are willing to go in employing their resources to achieve their mandate.
Investor expectations ahead of the meeting were fairly mute. Although conditions have obviously deteriorated since the ECB’s December meeting, many felt that given the disconnect between ECB communications and market expectations at the last meeting that Draghi would be eager not to stoke further easing expectations too much.
Following the decisively Dovish comments from Draghi today, further easing expectations have indeed been stoked and the Euro fell by nearly 1% in the wake of the press conference. The ECB’s “power and willingness and determination to act” may truly be put to the test if global conditions continue to worsen. Focus now turns to the March ECB meeting..
Trade Ideas update
EURUSD pierced the 1.08 support level but was able to reclaim the topside. No trade triggered but I will be monitoring the pair for a further break below 1.08 looking to position short against that level on any retests from below. I will update as necessary.
13.00 (GMT) Ahead Of The Press Conference
ECB President Mario Draghi is likely to voice serious concerns over recent financial market turmoil, having warned previously of external risks to the eurozone even when fears over China were easing, says Jennifer McKeown, senior European economist at Capital Economics. Mr. Draghi may also concede that the hard data point to very weak domestic activity in 4Q despite the positive tone of the surveys, she says. Draghi’s press conference is to start at 1330 GMT – WSJ
12.30 (GMT) More Bank Views For This Meeting
ING – “Our economists expect the ECB to keep all policy rates unchanged. Although lower oil prices and higher EUR increase the risk of a ECB dovish bias, the ECB is unlikely to act following the underwhelming meeting in Dec and the recent media reports that some GC members want to wait and see the impact of the current easing measures first before acting further. Hence, although President Draghi is likely to outline downside risksto the inflation outlook, the degree of dovishness should be limited (ie, no explicit signalling of further easing on the way –as was the case in the Oct meeting). Expect EUR/USD to hover around the 1.0900 level with a risk of testing the 1.1000 resistance should the ECB press conference disappoint.”
BNPP – “We expect the ECB to leave policy unchanged at today’s meeting despite the renewed decline in eurozone inflation expectations since the last policy meeting. Our economists’note that proximity to last month’s easing and an absence of new inflation forecasts make a move this week unlikely. President Draghi will likely continue to signal a dovish bias and willingness to do more if necessary, but after last month’s expectations management failure,he is likely to be cautious about definitively signalling a March move at this time(see here for more details). Overall, we would expect the impact on the EUR to be fairly neutral, with fluctuations in the risk environment likely to have more impact on EURUSD and EUR cross rates than the ECB message. Looking beyond this meeting, we continue to expect further ECB easing at some point this year, particularly if the EUR effective exchange rate continues to firm. We remain broadly bearish on the currency, targeting a move to parity in EURUSD by the end of Q3.”
12.25 (GMT) More Bank Views For This Meeting
Credit Agricole – ” Ahead today, the main focus will be on the ECB monetary policy announcement and not much seems to be expected although it remains a notion that the President will keep the door wide open for more easing. This seems to be more a function of the disappointing December meeting rather than the underlying data. Indeed, both the Eurozone inflation and real economic data have disappointed of late.
To make matters worse for the ECB, global growth conditions worsened, the oil prices tanked and global financial conditions tightened at the start of the new year. It would take a brave policy maker to ignore the above outlined conditions and risks triggering an unwarranted FX appreciation against the background of still elevated risk aversion and raging global currency war. It would also take a particularly courageous Governing Council member to ignore the latest EUR TWI appreciation.”
Goldman Sachs – ” ECB day is upon us and risk reward gives me a strong bias to be short Euro into the meeting with a plan of cutting if the meeting gives us nothing. Support at 1.08 and resistance at 1.0980 and 1.1050/60 above.” (Spot Trader View)
12.15 (GMT) Trade Ideas
EURUSD has remained in the range formed in the wake of the post-Dec ECB spike, hemmed in by support at the 1.08 level and resistance at 1.10. Dovishness from the ECB this week should see a break of 1.08 which sets up a short opportunity on the retest of the broken 1.08 support from below, if price action confirms the trade. Alternatively, if the ECB isn’t as Dovish as markets expect (they may wish to avoid stoking easing expectations once more following the market reaction in Dec) then we cold see EURUSD take out that 1.10 area. If we do make it above that area I would look to sell a retest of the late 1.10 area Sep 2015 lows.
12.00 (GMT) Some Bank Views For This Meeting
RBS – “We expect the ECB to leave its deposit rate and asset purchase programme unchanged tomorrow. Further easing initiatives would probably damage the ECB’s credibility coming so soon after last month’s package of measures. And while the recent bout of financial market turmoil and soft inflation data have strengthened the case for bolder action, forward-looking survey data and the ECB’s recent lending survey in contrast have been more respectable.
Mr Draghi will nevertheless surely indicate that the door is still open to further easing in the coming months at the post-meeting press conference. Market-based inflation expectations are still far too low for comfort and could become even further unhinged should the oil price continue its descent. Downside risks to the growth outlook have obviously increased as well as a result of the recent financial market instability. Validation of those concerns will still be required, however, via softer growth data before the ECB is likely to act again.”
Nomura – “Although we do not expect any changes to policy this week, the meeting is important for assessing the tolerance level within the Governing Council to the significant weakening in the (short-term)inflation outlook that has taken place and the earliest point at which the ECB is willing to make a “reassessment” on further easing.
•While some members of the Governing Council were resistant to further measures on 3 December, the recent Account of that monetary policy meeting indicates that the Governing Council has room –and potential appetite –for further easing, in our view.
•We expect a similar position to September 2015, with the ECB noting that renewed downside risks have emerged to the outlook for growth and inflation.However, we expect the Governing Councilat this stage to judge it premature to conclude whether the renewed sharp fluctuations in financial and commodity markets will have a lasting impact on the achievement of a sustained adjustment in inflation.
•Overall,we expect the easing bias to remain, with the Governing Council repeating it is willing and able to act by using all the instruments available within its mandate to maintain an appropriate degree of monetary accommodation”
11.40 (GMT) Reuters Preview For This Meeting
“The European Central Bank is likely to keep interest rates on hold when its policymakers meet on Thursday, even as a market crash, tumbling bank stocks and ebbing inflation set the stage for action later in the year.
The meeting of the Governing Council comes shortly after it cut the deposit rate in December, increasing the charge on banks for parking money at the ECB, and expanded its purchase program to buy chiefly government bonds.
This recent action, albeit short of what many on financial markets hoped for, has led economists to conclude that no significant further steps will be taken on Thursday but could follow as soon as March.”
11.20 (GMT) Expectations For This Meeting
Given the internal ECB rift exposed by the December meeting minutes it seems unlikley that the ECB will enact any further action at this meeting and so the key will be the accompanying statement and press conference. With Oil prices declines continuing to marr the inflationary environment it seems reasonable to expect a downward adjustment to the ECB’s inflation forecast, as we saw with both the Fed and the BOE. Whilst inflation expectations remain depressed the EUR is remaining supported due to risk-off lows. With EURUSD sitting right in the middle of the 2015 range the ECB will be keeping a close eye on any further strength and any moves towards 1.15 will likely be met with heavy Dovish rhetoric such as they were last year. Indeed, Dovish rhetoric is likely to be the name of the game on Wednesday with the ECB leaving the door open for further policy easing but giving current measures more time to take effect.
11.00 (GMT) The Global Picture
Since the ECB’s December meeting there have been some key developments. In terms of largest impact on the Euro and the considerations of ECB members we have seen a return to the fore of concerns surrounding the slow-down in China and the subsequent global equity volatility stemming from a sharp scaling back in investor risk-sentiment. This equity market volatility has worked to keep EUR supported as via is inverse correlation with risk we are generally seeing EUR appreciate as hedges and carry trades are unwound.
Secondly, and likely to be equally as prominent in the ECB’s discussions, is the continued Oil prices declines which have dominated markets. Central Bankers have been patiently waiting for Oil prices to rebound since summer last year but prices have continued to slide as the global supply glut deepened, taking Crude to below $30 for the first time in 12 years and consequently putting great pressure on the EZ inflation outlook.
10.20 (GMT) What’s Happened Since
EUR has remained firm against the US Dollar in the wake of the ECB’s December meeting, clinging to its post December ECB highs. Data since the last meeting has displayed a theme common among the G3 economies, with employment improving but inflation still under-performing.
On the positive side:
- EZ 3Q GDP printed in-line with expectations
- EZ Dec Manufacturng PMI beat expectations
- EZ Nov CPI beat expectations
- EZ Nov Unemployment Rate beat expectations
On the negative side:
- EZ Dec Services PMI undershot expectations
- German Dec CPI missed expectations
- EZ Nov Retail Sales undershot expectations
- EZ Nov Industrial Production undershot expectations
- EZ Dec CPI missed expectations
The minutes from the ECB’s December meeting revealed a deep rift within the ECB camp. The decision to cut deposit rates was not a consensus call and many members felt that the EZ economy is on the path to recovery and further easing would likely yield a negative effect. In contrast to this there were also some members who felt that more aggressive cuts were necessary. Investors had been expecting more aggressive action by the ECB at its December meeting and it appears clear now that the juxtaposed view of these opposing sides within the ECB tempered the actions initiated.
10.00 (GMT) Notes From The December Meeting
Investor expectations heading into the ECB’s December meeting were decisively Dovish expecting the ECB to cut its deposit rate and also increase and extend int0 quantitative easing program. These expectations were so strong in fact that the Euro was down nearly 1000 pips from the October meeting at which the ECB first aired its considerations of such moves. Draghi has a reputation of “over-delivering” in terms of policy adjustments and players were clearly banking on the EU chief doing the sae again today, anticipating that the Euro would be set sharply lower. However, this was not to be the case.
The ECB did indeed cut its deposit rate, in line with the expected 10bps reduction and it did also announce that QE would be extended, now set to run into March 2017 at the least, however there was no expansion of QE. Although the range of assets approved for purchase has been increased, the actual pace of QE, currently at 60bn Euros a month, was not increased.. These moves were a shock to market participants considering QE expansion a near certainty and EUR reacted sharply higher in response to the news as players took profit on EUR shorts held heading into the meeting as the very crowded EUR short trade has now seen a decent clear out.
Alongside the announced policy adjustments the ECB also revised lower 2016 inflation forecast to 1% from 1.1% and also 2017 to 1.6% from 1.7%. Draghi did however highlight that the EZ economy is in fact growing, stating that credit conditions are improving and QE is working.
09.50 (GMT) Welcome to our day’s rolling coverage
Hello and welcome to our live coverage of today’s ECB Meeting. Here are the key details for the day:
- European Central Bank December Meeting,
- Thursday December 3rd, 1245GMT
- Current rate 0.05%, expected unchanged