And would add the BOE, if I weren’t sure the Bank of England won’t bring anything new to the table next week. With investors still trying to come back from the latest adrenaline run triggered by US payrolls, eyes turned to what the European Central Bank will do next Thursday.
These last days had shown the imbalance between Europe and the US economies continues to widen: the FED trimmed its QE for another $10B now totaling just $25B a month, while European YoY inflation ticked lower to 0.4%, lowest level since October 2009, fueling deflationary pressures: the number may be enough to force ECB’s hand towards some unconventional economic measures, despite expectations is an “on hold stance.â€
Draghi has acted in June cutting the benchmark interest rate to 0.15% and introducing negative rates for interbank deposits, but seems not enough, and I’m not sure there’s a plan B ready for the upcoming meeting. Next logical step would be to launch an assets purchase program, but that’s easier to say than to do: “the use of such a form of monetary policy intervention need to be particularly stringent," said ECB Executive Board member Sabine Lautenschlaeger earlier this month, given the possible side effects, such as unacceptably low bond yields. "Too low yields on government and corporate bonds could create the wrong incentives and thus pose a significant risk," she added, noticing that the ECB should use this tool only in a real emergency situation, which for me is the case with inflation this low.
Anyway, the most likely scenario for upcoming ECB meeting is a wait and see stance, moreover considering TLTRO is estimated to be launched in September. EUR reaction afterwards seems hard to predict, but my take is that inaction from the Central Bank is more harmful for the currency than an announcement of extraordinary measures, which at the end will show they are doing something besides talks to fight deflation. Somehow, I can’t see the EUR/USD recovering ground during the next days, beyond the 1.3500 mark.
BOE and RBA
The ECB won’t be the only Central Bank and as usual, the BOE and the RBA will have their monthly meetings next week. As for the BOE, again market is expecting a non event there; next probable move will likely be a rate hike, but surely not this year. Any unlikely surprise, like a reduction of the assets purchase program, or a rate hike, should put Pound in ultra bullish mode, but chances are really limited. Attention, when it comes to the UK Central Bank, turns to Minutes lately and this month should be no exception.
The RBA can be a more interesting event: the Australian Central Bank is expected to keep its benchmark at 2.5% but insist on the “overvalued†Aussie wording, tearing the local currency further down. Employment readings in the country a couple days after will also be a market mover, particularly after last month extremely disappointing numbers. But for the most, Australian dollar looks heavy, and data supporting a bearish continuation may have a more sustainable effect, than positive one.
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