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The weight of expectations on the ECB

Once again, the ECB finds itself with a great weight of expectations upon its shoulders ahead of its policy meeting today. This week has seen both further falls in inflation and yesterday saw weaker than expected PMI data for the Eurozone and particularly Germany, which saw the manufacturing reading fall to a 15 month low. EURUSD retested the two-year lows seen on Tuesday. For much of the year, the ECB has been working through the options on buying asset-backed securities. This market is comparatively small in the euro area, with the ECB at the same time looking at ways to increase its liquidity. By buying such assets, loans are removed from bank balance sheets, leaving them better capitalised and more able to lend elsewhere in the economy. But the impact is still uncertain and other efforts to improve matters, such as the TLTRO lending have so far proven disappointing in their take-up. Near-term, the best and probably most effective stimulus that the ECB can hope for is a weaker currency and whilst recent measures have certainly helped that development, currency markets will be sensitive to any further signs of the ECB’s desire for currency weakness today. The interest rate announcement comes at 11:45 GMT, the press conference following at 12:30 GMT.

Elsewhere, there were some signs of the the dollar’s legs becoming a little tired yesterday, failing to make new highs against its counterparts after the ADP report beat showed that the US private-sector added more than 200K jobs for a sixth time the past seven months. The rebounds continued as more US data got released, with the Markit and ISM Manufacturing PMIs coming in below expectations and well below their August readings. This momentum continued well into the Asian session with the USD paring some of the gains it has experienced in recent months particularly versus the commodity currencies which may be boosted from the decision of Chinese policy makers to loosen property restrictions for the first time since the Great Recession.

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