Today’s European Central Bank meeting is critical. ECB board members have been quiet on normalization, so it should provide insight into the minds of Draghi & Co for any quantitative-easing tapering or interest hikes. Last quarter’s decelerating European growth will hurt the GDP outlook. Weak prices are sending core inflation back towards cycle lows. ECB’s corporate line is that risks are transitional and balanced. But given the soft-patch, no one would be confused by an ECB pause in hawkishness. With economic worries haunting, the risk is increasing that an anticipated June or July decision of tapering might be delayed.
Meanwhile, political risk and hype is building in Italy, Spain and Greece, which might change the ECB’s mind. The recent, sharp rise in interest rates on the periphery suggests tighter finances for the region’s weaker nations. However, the threat of a shock will only strengthen the ECB’s desire to get policy off the bottom, because it has few options to manage a crisis. Rates are already negative and bond buying is running into supply shortages. As with the US Federal Reserve in 2013, the need to remove extreme policy, to regain policy firepower, outweighs temporary economic weakness. Given the weakness in EUR/USD, the market is underpricing ECB’s commitment to “normalization.”
This report has been prepared by AC Markets and is solely been published for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any currency or any other financial instrument. Views expressed in this report may be subject to change without prior notice and may differ or be contrary to opinions expressed by AC Markets personnel at any given time. ACM is under no obligation to update or keep current the information herein, the report should not be regarded by recipients as a substitute for the exercise of their own judgment.