'Real easing effort from ECB unlikely to happen until the fourth quarter' - Ilya Spivak, DailyFX

   Ilya
Spivak

PROFILE:
• Current Job:  Currency Analyst at DailyFX.
• Career: He holds degrees in Economics and International Relations from the University of California.

View profile at FXstreet.com

Ilya Spivak applies a global macro approach his analysis, taking a longer-term view on investing in the G10 currencies that often incorporates cross-market relationships and geopolitics. Ilya’s research has appeared on CNN Money, Reuters and Bloomberg News. Before DailyFX, Ilya spent a number of years in FX Sales and as a Researcher at the Center for International Trade Development. He holds degrees in Economics and International Relations from the University of California. Ilya authors a number of regular articles for DailyFX.com.

Do you believe that the new Italian PM Matteo Renzi is good news for the country's economy? Will he receive enough backing to implement his pro-growth reform program?

Italy’s benchmark 10-year bond yield has continued to trend steadily lower through the recent upheaval in the country’s political sphere, suggesting the markets aren’t particularly concerned about the change from Letta to Renzi in terms of its implications for funding stress. As such, the impact of the shift in the administration ought to have limited implications for the Euro, at least thus far.

What immediate consequences will the Japanese consumption tax hike in April have? What long-term effects do you expect?

This is the operative question in Japanese economic policy at the moment. The Bank of Japan has not introduced a meaningful expansion of stimulus efforts as it waits to see how the sales tax increase will impact growth and the fight against deflation. The critical question will be whether the government’s own fiscal stimulus effort will be enough to offset the tax’s negative implications for economic activity. If not, the BOJ will likely have to do more, which would likely prove Yen-negative. We shall have to see how this plays out, with a clear-cut assessment likely to wait until the second half of the year.

Do you expect the ECB to ease monetary policy to counter low inflation in March?

The ECB seems to be buying time before introducing additional stimulus to complete its Asset Quality Review (AQR). This ought to help policymakers craft a program that has better policy transmission, which has been a major problem for the ECB over recent years. The final results are due in November, so unless the slide into deflationary territory meaningfully accelerates we are unlikely to see a real easing effort from the ECB until the fourth quarter. That doesn’t mean the markets won’t speculate on the possibility of further accommodation however, which means soft inflation data may still translate into near-term Euro weakness (as we saw with German PPI data this week).

Taken that the BoE seems to be the first central bank to close the accommodative cycle and the Fed delaying the QE tapering process, what would be the GBP/USD future in the short and middle term?

The Fed has forcefully rejected the idea that it will slow or delay the QE tapering cycle. Meanwhile, the BOE has reframed its forward-guidance regime such that policymakers aren’t forced to hike rates in the near term. On balance, that means that GBP/USD now looks overbought and vulnerable to a near-term correction lower. Prices have shown early signs of topping above the 1.68 figure this month and further weakness seems like a distinct possibility, with the key pivot near 1.6260 lining up as an important downside barrier over the coming months.

Dollar weakness outstands, as disappointing economic data in the US sent investors to price in an on hold decision for March coming from the FED. The EUR, despite its self-weakness has managed to advance. What's your take on the pair, who will win the battle of the "less weak"?

I see recent US Dollar weakness as having had very little to do with recent US data. It seems to have had much more to do with the unwinding of EM-related risk aversion that initially erupted in late-January. On the whole, the Fed’s gradual move to reduce and ultimately unwind stimulus coupled with the likelihood of further ECB stimulus this year suggests the dominant EUR/USD bias favors the downside over the medium- to long-term.