ECB & BoE: What would you expect from Central Banks?

So, you’ve seen good Eurozone data and are hoping that the union is finally on the recovery path, haven't you? Surely this means ECB President Draghi will change his statement in the upcoming meeting and change its monetary policy. You’ve suspected that, right?

Let's check facts, Greece now has more debt than the Troika expected in its pre bailout plans. In Spain the unemployment is above 26% and younger employment is around 50%. That means statistically if you got a job, there is a good chance that your friend doesn't. The same in Portugal.

Unemployment in Germany is lower than in the United States, but is the Eurozone is better shape than its American counterpart? So why is the Euro is too high? is the 1.3200 for EUR/USD fair value? The EU emerged from recession in the Q2, but be sure that the road is still far than happiness. Is it a long lasting improvement?

Despite the words of Lawrence McDonald who believes that systemic global risk hot spots were in the USA between 2007-9, the Eurozone in 2010-12, and now in Asia in 2013-15, nothing has changed yet. And as Steve Ruffle said in this report: "the ECB will make a as little change to the monetary policy as they can"

So, experts don't expect too many changes in the ECB and BoE position. Be ready, reviewing closely and checking new data. And definitely ‘will they/ won’t they taper,' and it is just too early to call for a recovery in Europe.

FXstreet.com asked experts to answer two question about what going on about the ECB and the BoE, here their answers:

Questions:

1. Following the latest good economic data, do you see winds of recovery in the union? Do you expect the ECB modifying its monetary policy in any way? Less dovish bias?

2. It will be time to expand asset purchase program or do you see the BoE still deciding other options?

Answers:

Steve Ruffley Chief market strategist Intertrader.com

1. There is no recovery in the EU it is just a series of structured stutters. Mario Draghi has been a massive disappointment to me and the fact that the recent data has been relatively good doesn’t not fill me with any confidence of a sustained recovery. The ECB will make a as little change to the monetary policy as they can. With the ‘will they won’t they taper’ in the US, Draghi and co have neither the gumption or the acumen to make any drastic change to policy. With Greece now having more debt that pre bail out and the rampant employment in Spain and Portugal, even though the bond markets are taking it easy on them, these countries still hold massive threats to the EU and the Euro. Noises being made of trouble with France’s finances, in my opinion buy these dollar dips.

2. Carney has been guilty of FED following. Again linking the interest rates to unemployment is not the worst idea but it is certainly more of a wait and see ‘get out of jail card free’ call. After hearing Carney’s first speech and making references to inflation I really thought this was an opportunity to get a grip on inflation and rates. We produce very little so a strong Pound would see plenty of foreign money come into the UK, but I guess new to the job he went for the safer option. There is no money to increase the asset purchase program, so that answers that mystery. We have recapitalised the banks and steadied the ship. It is clear we can’t artificially create growth. It’s time the banks started lending and the UK does what it does best, carry on regardless.

Bill Hubard, Chief Economist at Markets.com

1. The ECB. The key Euribor lending rate held steady for the second day running on Tuesday after ECB policymakers offered mixed views on the prospect of further interest rate cuts. The Eurozone economy emerged from recession in Q2 and a survey last week showed business activity across the Eurozone picked up this month at a faster pace than expected.

German business sentiment surged to its highest level in 16 months in August, data from Ifo showed on Tuesday. ECB policymaker Ewald Nowotny said last week he saw no reason at the moment to cut rates. Bundesbank President Jens Weidmann told the Handelsblatt newspaper on Sunday he saw no change in the ECB's monetary policy stance.

But Cypriot central bank governor Panicos Demetriades told Bloomberg that a rate cut was still "on the cards", but added that the most recent data was "more encouraging". The ECB holds its next policy meeting on 5 September, and Markets.com sees NO change. Period!. 3-month Euribor rate was unchanged at 0.225%; 6-month Euribor rate was also ‘steady’ at 0.345% and the 1-week rate was unchanged at 0.106%.

Excess liquidity in the Eurozone banking sector stood at €244bn, still high enough to keep short-term market rates below the ECB's refinancing rate. The ECB said in its July monthly bulletin that as long as excess liquidity "remains above a certain threshold, estimated to be in the range of €100bn - €200bn, short-term money market rates are expected to stay slightly above the deposit rate". The ECB's main refi rate is at 0.50% and the deposit rate at zero.

2. BoE/MPC. Mark Carney, governor of the Bank of England, told Sky News on 7 August that officials are providing clarity so that consumers mulling a big purchase or businesses debating investment “can make decisions with as much certainty as possible.” As the global financial markets prepare to listen to Carney’s first official speech in Nottingham on Wednesday, everybody will be seeking more insight into the BoE’s plan to keep its benchmark rate at 0.50% until 2016. Investors have already expressed their doubts by adding to bets on higher interest rates before then and pushing up gilt yields and the pound.

Carney needs to convince if his “ forward guidance” is to gain traction by inspiring businesses to invest and consumers to shop. Under the policy, the BoE plans to keep its key rate unchanged at least as long as unemployment exceeds 7.0%providing the economy doesn’t overheat. The jobless rate was 7.8% in Q2 and the BoE sees it above the threshold until late 2016.

For monetary policy to work most effectively, people need to understand that rates are going to stay low until the recovery is stronger, Saying the message often and simply should help. Financial markets are already questioning the strength of Carney’s commitment. The implied yield on short-sterling contracts expiring in September 2015 has risen 34 bps this month to 1.28%. It reached 1.36%last week, the highest since June. The extra yield investors demand to hold 10-year gilts rather than German bunds widened to 85 bps on 19 August, the most since June 2010, and was 75 bps on Tuesday. Sterling, on a trade-weighted basis, has risen about 2.0% against a basket of 9 developed-market currencies in the past month.

The gap between Mark and market is now big enough to be a serious concern for the new governor. Wednesday’s trip to meet regional business leaders in Nottingham, the home of legendary outlaw Robin Hood, is the latest chapter in Carney’s communications drive. To spread his message, Carney has granted 5 broadcast interviews in the past month and will speak to reporters again after the Nottingham speech. Predecessor Mervyn King was less accessible to the media, preferring in general to limit comments to quarterly press conferences and prepared speeches. Deputy Governor Charlie Bean said he was a “little bit” surprised by the market reaction. Still, he said at Jackson hole last weekend that the bank is trying to give a “clear signal that interest rates are not likely to rise imminently” and that executives told him on a recent trip to Northern Ireland “how valuable they thought guidance was.”

Carney may already be gaining some traction. The number of households expecting the BoE to increase rates in the next 2 years fell to 40% this month from 53% in July, according to a Markit Economics Ltd. poll of 1,500 people. About 25% anticipate an increase within the next year, down from 35% in July. A worry for Markets.com is that people do NOTpay attention to the so-called ‘knockouts’ in the policy pledge. By jumping to the conclusion that rates are on hold for 3 years, they may take on too much risk. That’s in spite of Carney’s caution that the guidance is conditional on data and not guaranteed.

Even if they are hearing correctly, unemployment and inflation trends can be “tricky for people to monitor” as they try to gauge the outlook for rates. Another point ofpotential confusion is that officials themselves appear divided, with several having questioned guidance before Carney’s arrival. Martin Weale voted against it this month because he wanted the inflation-escape hatch to be bigger, while some members of the Monetary Policy Committee said market expectations were not “obviously out of line,” according to minutes of their 1 August discussion. That means “more dovish words” from Carney!!! And if that doesn’t work then we’ll see more votes for quantitative easing.

Ilian Yotov, FX Strategist and Founder at AllThingsForex:

1. Activity in the euro-area has been picking up, ending the chronic contraction in euro-zone's manufacturing and services sectors. But the 17-nation economy is still struggling with record high unemployment and such economic backdrop will not be supportive of the European Central Bank tightening monetary policy anytime soon. The USD should be able to regain its strength against the EUR as the Fed gets ready to take the first step towards monetary policy tightening while the European Central Bank remains stuck in an easing mode.

2. With the U.K. economy and its largest trading partner the euro-zone improving, the Bank of England has no urgency to ease monetary policy further and will maintain the benchmark rate and the size of the Asset Purchase Program unchanged in September and maybe into the final quarter of the year. The bank's forward guidance will keep the pound's future direction closely linked to the results of upcoming economic data, with the GBP strengthening on good reports and facing weakness if the data disappoints.

Yohay Elam, Analyst at Forex Crunch

1. The ECB is unlikely to change monetary policy at this point: it would not want to be seen as influencing German elections in any way. The economic situation is better in some economies, especially in Germany, but this recovery is quite fragile. Mario Draghi tends to zig-zag between positive and negative moods in the press conferences. As the previous event was somewhat positive, Draghi could express caution now and perhaps express worries about the relatively high exchange rate of the euro.

2. The UK has seen more and more signs of solid growth in recent months, limiting the scope for additional QE. The announcement of forward guidance is also relatively fresh, and the central bank could leave policy unchanged. After making a policy speech just a week before the rate decision, the MPC is likely to refrain from releasing a statement, and leave the fireworks to the meeting minutes.

Lyndon-Marc Adade

1. Europe remains highly divided economically between north and south and economic recovery means very different things in each region. In the north, a gradual recovery is underway much like in the US (but probably 18 months behind), with economic growth and employment slowly returning towards trend levels. But it will still take several more years of uninterrupted growth for this to happen, and key risk events are on the horizon notably the German election, a third bail out of Greece and a deterioration of the situation in the PIGS. Across southern Europe the last six months has seen the economic picture stabilize somewhat but remain very troubling. How long the populations of Spain and Greece put up with 25+ per cent unemployment is still very uncertain. The economic environment is not improving in southern Europe, although not getting any worse – but this has been interpreted much more positively than is justified.

2. The announcement of forward guidance is supposed to be the first small step by the Bank of England in the long and winding road of finally withdrawing monetary stimulus. But the success or otherwise of forward guidance may mean further QE is needed should longer rates rise more than the BoE deem warranted. The Bank does not want higher rates choking off the recovery and we can expect them to first use the threat of further QE to manage interest rates if needed before the asset purchase scheme is extended.

Adam Narczewski, Financial Analyst at X-Trade Brokers, XTB:

1. ECB: The situation is similar to that we had one month ago. There is good macro data from the Eurozone economy and Mario Draghi will ignore them again. I expect him confirming the economy is improving but at the same time confirming that forward guidance will be kept. In this situation the Euro will depreciate.

2. BoE: Forward guidance was introduced and I believe the Bank of England will focus on that at this moment. The British economy is doing better so I do not see a reason for Mark Carney to make any sudden moves on the upcoming meeting.

Layalee Ramahi: ICN.com Strategic Manager

1. The signs of bottoming out in the union are surely encouraging, but still too early to count on a solid based rebound, more time and stability in indicators is needed. The ECB is surely happy of the progress seen, but with the forward guidance in place and assurances on many occasions from different members the change in rhetoric is still early to be seen or shift to hawkish, inflation is in check and that gives time for the ECB to maneuver and work on supporting the sentiment without additional stimulus for now. Building the sentiment now is all it takes to help nurture the signs of recovery and the ECB for sure this meeting will not be changing their mind all a sudden and Draghi will be pleased to comment on the recovery indeed!

2. As for the BoE, Carney’s speech had it all, the bank is not in a hurry for now to change its mind, and the forward guidance in place as well keeps focus on the recovery and the labor market in a Fed-style approach. The BoE offered a smooth move in allowing major banks to free up extra liquidity and is it for now with Carney calling the recovery broad-based the MPC will not be quick to jump into further easing for now and instead focus as the ECB on nourishing the sentiment assuring banks and businesses especially SMEs that they are their backstop and there to ensure adequate environment to support the recovery.

Valeria Bednarik - Chief Analyst with FXstreet.com:

1. I do believe is too early to call for a recovery in Europe, but indeed, there’s a chance Mr. Draghi will upgrade his economic outlook this month, based on latest positive economic indicators, while leaving economic policy unchanged. A less dovish bias is what I would expect, but there’s a long road ahead before the Central Bank can become hawkish, and markets believe it.

2. I don’t think the BOE will expand its Assets Purchase Program in September. In fact, I do believe the bank is closer to reduce it, rather than extended, but none of both taking place this year. As for rates, Carney made it clear that will likely remain at current record lows at least until 2016, so as usual, I would expect BOE economic policy decision as a non-event.