European Central Bank Seeks to Recover Credibility

The ECB is Expected to Keep QE Unchanged but Work on Market Communication

The ability to communicate clearly with markets by the ECB was questioned after the December 3, 2015 rate statement. At first it was a welcomed surprise how the central bank headed by Mario Draghi had a higher sense of urgency and wanted to act before the end of the year to add more stimulus rather than wait until 2016 as most forecasters had anticipated. The rhetoric by Mario Draghi was enough to drive the EUR lower, but all that was quickly reversed when he delivered less than promised on the December central bank meeting.

There are few expectations the ECB will add additional stimulus next week. The Chinese market turmoil that started a major sell off in global stock markets along with the drop in oil prices continue to put downward pressure on inflation, with the market anticipating a move from the ECB in March after the QE extensions in December. Mr. Draghi has the opportunity to alert the market of the ECB’s eventual decision, but this time avoiding the miscommunication from the last monetary policy meeting. The ECB will announce its minimum rate on Thursday, January 21 at 7:45 am EST to be followed by a press conference with President Draghi at 8:30 am EST.

The first monetary policy of 2016 will have the ECB addressing rapidly deteriorating global economic conditions. The eagerness to act that the market misread (or was miscommunicated) from the ECB leaves few analysts anticipating an expansion of the quantitive easing program or push the interest rate deeper into negative territory.

The central bank is a complex amalgamation of central bankers that do not see eye to eye, mostly because the economies they represent are not in the same position. The battle between hawks and doves makes it hard to reach consensus. The market should have focused more on the great triumph the QE extension represented in the context of the governing council. Mr. Draghi could also have downplayed what he thought was a great victory and was probably to eager to tell the world that he created a false expectation.

That failure to communicate appreciated the EUR/USD from the 1.06 price level to reaching 1.10 and even the Federal Reserve’s historic first rate hike did not manage to return the pair to near previous levels. The EUR/USD is trading at 1.0888 and is caught in a range in the past month with Draghi’s rhetoric the main candidate to depreciate the value of the EUR and help the Eurozone economy beat the looming deflation.

EUR events to watch this week:

Thursday, January 21
7:45am EUR Minimum Bid Rate
8:30am EUR ECB Press Conference
8:30am USD Philly Fed Manufacturing Index
8:30am USD Unemployment Claims
Friday, January 22
3:00am EUR French Flash Manufacturing PMI
3:30am EUR German Flash Manufacturing PMI
8:30am CAD Core CPI m/m

*All times EST