The US Federal Reserve chairman Jerome Powell reiterated his stance of gradual monetary policy normalization in the US. The ECB President Mario Draghi also used the central bankers’ gathering in Sintra to confirm the message from last ECB Governing Council meeting that although asset purchasing will end in December, the ECB will remain vigilant with monetary policy accommodation, meaning the interest rates will remain low for at least first half of 2019.
European Central Bank
The European Central Bank delivered quite a few changes and triggered quite a bit of volatility, yet not in favor of the common currency. The monetary hawks score one goal: the ECB announced the tapering of bond buying in its June decision, defying expectations that the decision will wait until July. However, the doves scored three critical goals: 1) The tapering is not as quick as some had expected: There were some prospects that the ECB would taper to €15 billion in October, €10 billion in November, and €5 billion in December. The result is not a gradual tapering but a reduction to €15 billion for each of these months in the last quarter of 2018.
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June ECB meeting preview
The ECB’s asset purchasing is coming to an end as the evidence if the inflation drivers reappeared on the horizon and the ECB chief economist Peter Praet was the person to let this out to the public. The Italian fear factors dissipated recently with the new Italian populist government formed and scaling back the fears of new elections becoming de facto the Eurozone yes or no vote. In terms of ECB’s main policy goal, the inflation, the conditions are favorable for the Governing Council to declare the war with disinflation won as both weaker euro and the surge in oil prices in recent months should add convincing signals.
Today, we have an all-important ECB meeting and as we get close to the decision timings, here are the expectations as forecasted by the economists and researchers of 8 major banks for the upcoming meet. Most of the researchers and economists expect the ECB to announce another recalibration of QE this week, but at the same time suggest that it looks very unlikely that the ECB will announce an end date for QE any time soon.
April ECB meeting review
ECB President Mario Draghi did not drag the Euro lower. At the opening remarks of his press conference, Draghi referred to the most talked about topic in the euro-zone: the signs of a slowdown. He said it is partly a result of the high growth seen in Q4 2017 and also mentioned temporary factors. Weather, strikes, the timing of Easter and more factors are behind this moderation. And then, Draghi expressed confidence that the underlying growth factors are resilient. In response to a question, Draghi said that the decline has stabilized and the levels are still above historical highs
After a relatively dovish message in March, where the ECB surprised markets by signalling it was on track to end its stimulus program before the end of 2018, the risk to the Euro was that President Draghi would ratchet up his concerns over the outlook for the Eurozone economy. Indeed, Draghi acknowledged the growth slowdown, but he remains confident that inflation will reach target.
It is always a challenge when you have to say something when you really don’t want to. And sometimes you can’t just run away, you have to bide your time. But Mr. Draghi can cope with such a situation like no one else, as he has amply demonstrated in the past. And several in-depth questions for Mr. Constancio – who attended his last GC meeting – provided a welcome distraction.
what is the ECB?
The European Central Bank is the central bank empowered to manage monetary policy for the Eurozone. With its beginnings in Germany 1998, the ECB is empowered to maintain price stability in the euro area, so that the euro’s purchasing power is not eroded by inflation. As an entity independent of individual EU countries and EU institutions, the ECB aims to ensure that the year-on-year increase in consumer prices is less than, but close to 2% over the medium term. Another of its tasks is the one of controlling the money supply. This involves, for example, setting interest rates throughout the euro area. The European Central Bank’s work is organized via the following decision-making bodies: the Executive Board, the Governing Council and the General Council. Mario Draghi, member of the Executive Board, is also the President of this organism. His speeches, statements and declarations are an important source of volatility, especially for the Euro and the currencies traded against the European currency.
who is ECB's President?
Mario Draghi was born in 1947 in Rome, Italy. Graduated of the Massachusetts Institute of Technology, he became President of the European Central Bank in 2011. Draghi gives press conferences in the back of how he observes the current European economy. His comments may determine positive or negative trends for the Euro in the short-term. Usually, a hawkish outlook is seen as positive/bullish for the EUR, while a dovish one is seen as negative/bearish.
How to Trade the ECB Rate Decision
Prior to the Rate Decision:
- Many traders buy the rumors and square their positions shortly after the decision is made. For instance, if the market believes that the European Central Bank will hike the rate; traders buy the Euro and close the position shortly after the announcement. On the other hand, if the expectation is a rate decrease, traders will short the Euro and square the position after the announcement.
After the Rate Decision:
- If the market’s expectations differ from the actual rate decision there can be some excellent trading opportunities.
- If the market is expecting a rate hike, but the European Central Bank ends up cutting the interest rate, a short 1-2 hour trade selling the Euro may prove successful.
- If the market expects a rate cut, but the ECB comes in with an increase in the rate, a trader may want to place a short long position on the Euro for 1-2 hours.
hike, low or mantain interest rates
The decision always has an effect on the Euro.
When the interest rate is increased the European Central Bank is literally selling government securities to large financial firms. In turn, the financial organizations are paying in Euros for these securities. This effectively decreases the amount of currency circulating in the economy. A decreasing supply leads to higher demand, and therefore causes the value of the Euro to appreciate.
When the interest rates are decreased, the European Central Bank floods the market with Euros. This is done by the purchasing government securities from financial organizations. In return for the securities, these banks and financial deals are paid in Euros, therefore increasing the supply of Euros in the economy. As supply increases, the value of the Euros depreciates.
the world interest rates table
The World Interest Rates Table reflects the current interest rates of the main countries around the world, set by their respective Central Banks. Rates typically reflect the health of individual economies, as in a perfect scenario, Central Banks tend to rise rates when the economy is growing and therefore instigate inflation.
concepts you need to know
In practical terms, QE means that central banks create money out of nothing to buy securities, such as government bonds. This new money swells the size of bank reserves by the quantity of assets purchased and that’s why this programme is called Quantitative Easings. The money supply is intended to flood financial institutions with capital in an effort to stimulate lending and increase liquidity.
Much of the governments’ debt is held by banks in the Eurozone and the ECB wants them to give more credits. If the European Central Bank buys government bonds, their prices rise and profitability drop even more. This is a liquidity-providing operation that weakens the value of the euro. This depreciation makes European exports cheaper and competitive, and ultimately, helps in recovering. In addition, as a result of the stimulus to internal and external consumption, the ECB combats the risk of deflation, a widespread and prolonged drop in prices, as well as the high unemployment.
The long term refinancing operation (LTRO) is a cheap loan scheme for European banks that was announced by the European Central Bank towards the end of 2011 in a bid to help ease the eurozone crisis.
Round one was carried out on 21 December, when banks took €489 billion from the European Central Bank. The loans are due to be repaid within three years at a rate of 1%, and a second round will be launched on 28 February, with the results of how much money was requested due on 29 February.
As the eurozone crisis has escalated, banks have become less stable and have less money to lend. The objective of the LTRO is to boost cash flow in the market and avoid a severe credit crunch or collapse of the banking system.