The following article was written by Jasper Lawler, Senior Market Analyst at FCA regulated broker LCG.
ECB To Hold Steady As Trade Risks Intensify
The ECB are not expected to move on rates this month, however traders will be watching closely for any clues on the central bank’s next steps and its views on the increasing trade tensions.
There is a good chance that this meeting will actually be fairly uneventful, given that the ECB made a surprise announcement to end its QE programme and accompanied this with a dovish change to its forward guidance at its previous meeting, in June. The ECB affirmed that interest rates will be kept at current levels “at least through the summer of 2019”, which sent the euro plummeting as optimism for a hike prior to the summer was pared back. With this in mind, there is a good chance that July’s meeting will instead focus heavily on discussions surrounding the economy and trade war risks rather than particular monetary policy.
The Eurozone economy
After the eurozone had a sluggish start to the year, there were hopes of a rebound in the second quarter after strong industrial production numbers in May and encouraging PMI data in June. However, July’s PMI’s did not outright confirm the rebound was still on track, with a surprise drop in the service sector PMI, whilst the manufacturing PMI moved higher. Meanwhile, the labour market continues to tighten, wage growth has edged higher, news which should provide some encouragement to the ECB, even if actual core inflation has remained very low.
Clarity on timing?
Draghi is likely to be pressed by reporters to give more clarity on what “through the summer of 2019” actually means, whether its July, September or possibly even later? The chance of gaining more clarity on this is fairly slim. This phrase, no doubt, was created to give the ECB flexibility to raise before or after the summer depending on the performance of the economy. So Draghi is unlikely to box himself in, a year ahead of time.
Trade war risks
Whilst political instability in the eurozone has calmed significantly, instability on the international stage owing to growing trade tensions will almost certainly be a central topic discussed at this meeting. Traders will be keen to hear Draghi’s take on the expected impact of the unfolding trade war, particularly given that the negative effects have already started to be felt in business confidence in the Eurozone and in Germany. And this, despite the fact that China has so far been Trump’s main target. With Trump’s latest threat of 20% tariffs on all automobiles from Europe (later withdrawn after meeting with EU’s Juncker), the ECB would be right to discuss the potential implications on the economy and any signs of deep concerns could send the euro lower.
Potential market reaction:
With no new quarterly projections and after the big announcements last month, and mixed data since, we are not expecting any big revelations or deviations from June’s message. Deep concerns over the potential impact of a trade war with the US or a strong reiteration of June’s dovish message could see the euro target $1.16.
On the other hand, positive talk surrounding the eurozone economy or any clarity over timing of the next hike, such as before September, could see the euro find its feet and power back towards the top of the current range at $1.1850. That said any gains in the euro could find themselves limited by recent dollar strength.
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