City Index | Sep 11, 2019 13:16
Expectations are running high ahead of tomorrow's ECB monetary policy announcement. There seems little chance of Draghi quietly slowing down ahead of his departure in October. Instead all eyes will be on him to see if he can pull one last rabbit out of the hat and go out with a bang.
Expectations are for 10 basis point overnight deposit rate cut, with a sizeable bond buying programme also on the cards. But are investors expecting too much? Anything short of these expectations could boost the euro.
What the data says?
The economic picture in the eurozone over the past few months has deteriorated. Eurozone GDP has slowed considerably to just 0.2% in Q2, down from a more solid 0.4% in Q1. Whilst employment and consumer consumption are holding up, the manufacturing sector is slumping.
PMI’s have languished below 50, the level that separates contraction from expansion for several months. Data from Germany, the once powerhouse of Europe, now more the Achilles heel, makes for grim reading. The manufacturing pmi has remained at 43 across several months, whilst industrial production continues to decline. Evidence is mounting that struggling manufacturers could tip Europe’s biggest economy into recession.
There is no denying that the picture is pretty gloomy. Weak growth, slumping manufacturing sector, subdued inflation have all increased expectations for looser monetary policy. Add into the picture Draghi’s comments from the last ECB meeting when he explicitly said that the central bank would act in September and Finland President Olli Rehn’s suggestion that the “stimulus package could overshoot investors expectations” and its easy to see why the markets are expecting a sizeable stimulus package and rate cut.
The EUR/USD is dropped 2-year lows, as expectations of heavy-handed stimulus was priced in. More recently the euro has edged cautiously higher as more hawkish policy makers have suggested that the markets’ forecasts have gone too far.
Following the more hawkish comments the EUR/USD has liftedfrom the 2 year low and is pricing in a 10-basis point cut rather than 20 points previously expected.
The ECB are also expected to leave open the possibility of further cuts. Failure to do so could send the EUR surging back towards $1.11.
A deeper cut than 10 basis points and would exceed expectations and send the euro lower back toward last weeks’ two year low of $1.0926.
Regarding a new asset purchase programme, whilst some market participants believe the ECB will engage in a new programme this month, we expect Draghi to commit to restart in October with repurchases of €40 billion per month.
The euros reaction will depend on the depth of the rate cut, the commitment to do more and any mention of a bond buying programme. However, with so many dissenting voices in the ECB Draghi may struggle to deliver on such dovish market expectations potentially sending the euro higher.
Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient.
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.
Written By: City Index
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
Get free real time quotes, charts and alerts on stocks, indices, currencies, commodities and bonds. Get free top of the line technical analysis/predictors.
More content, faster quotes and charts, and a smoother experience is available only on the App.