The 1000th board meeting to be held by the ECB will take place later today. Although it may be momentous in the history of the central bank, we don’t expect any change in policy after December’s decision to extend its Asset Purchase Programme (APP) through to the end of 2017.
Stock market boost from last meeting still playing out
The announcement on 8th December was a little more aggressive than we expected, and since then the Euro Stoxx 50 equity index has rallied nearly 5%. The euro has also staged an impressive recovery since the start of January after falling below 1.04 vs. the US dollar in the aftermath of last month’s ECB meeting. Eurozone bond yields are also mostly stable, 10-year Italian bond yields are virtually unchanged since the last meeting.
Economic strength is challenge for ECB
The key difference between the December and January meetings, is the economic backdrop. After a series of impressive economic data of late, the Citi Euro-area economic surprise index has risen to a its highest level since 2010, and German inflation is at its highest level for 3-years, at 1.7%. This has led to calls from the German Finance Minister for an earlier end to the ECB’s stimulus programme.
The improvement to the Eurozone’s economic backdrop highlights the challenge facing the ECB President right now: how to handle differences of opinion within the Governing Council, and how to justify a stimulus programme when inflationary pressures are building.
ECB not taking chances in year of unprecedented political risks
Overall, we think that ‘slowly and steady’ will win the day at the ECB. The minutes from the December meeting suggest that the Bank wants to remain active in the bond markets during an unprecedented year of volatility. Trump’s potential protectionism, the triggering of Article 50 by the UK government, and elections across the EU, highlight the extent of political and economic risks facing the region in 2017. Thus, the ECB is unlikely to rock the boat at its first meeting of the year.
One pressing problem for Draghi is how the Bank deals with the dearth of French and German bonds needed to maintain the current level of its APP programme. This lack of high quality bonds could seriously impact the ECB’s ability to extend its APP programme through to the end of this year. We imagine that, if asked during the Q&A, Draghi will say that this is not an issue. But, if he does flag it for concern then we could see risk sentiment slip from the market, although any threat to the APP programme could be good news for the euro.
Trump in focus once ECB meeting concludes
Overall, aside from the ECB meeting later today the focus is likely to shift to Trump’s inauguration on Friday. We have seen stock markets hit the pause button, while financial stocks, particularly in the US, have come under pressure before Trump moves into the White House. We expect volatility to stay low today, although we are prepared for a spike higher ahead of the weekend, depending on comments from President Trump after he is sworn in as President.
FX market in check ahead of inauguration
The FX market could see the most volatility in the next 24 hours. The dollar rallied on comments from Fed chair Janet Yellen that the economy is ready for a gradual increase in rate hikes, however it is giving back some of this gains on Thursday morning. We will be watching to see if the threats posed by the new President, who complained about a strong dollar earlier this week, keeps the greenback in check today. Key levels to watch for EUR/USD in the short-term is 1.0800 on the upside – a key resistance zone from early December, and 1.0584 – the 50-day sma – which could act as support.
Overnight volatility levels in EUR/USD have been rising as we head into the ECB meeting, however we believe this is down to sterling and dollar volatility and it does not suggest that the market is expecting a big move from today’s ECB meeting.
GBP rallies remain weak, even after May’s Brexit speech
The pound will also be in focus after giving back nearly 50% of the gains made on Tuesday, during the PM’s Brexit speech, and is currently trading around 1.2270. GBP/USD could not maintain a break above 1.24 on Tuesday, which reinforces this level as short –term resistance. We don’t expect a move back to the critical 1.20 support level in the next 24 hours, whether we breach this key psychological level could depend on what Trump chooses to say in his first speech as President on Friday.
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Any references to historical price movements or levels is informational based on our analysis and we do not represent or warrant that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, the author does not guarantee its accuracy or completeness, nor does the author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
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