Monetary Policy in Focus – Will Markets Have Faith in Central Bankers?

ECB’s Draghi added more measures to stimulate the European economy than the market had expected, but since no additional rate cuts were signalled, the market bid the EUR higher testing 1.12+ against the US Dollar before closing the week at 1.1150. Global stocks continued to rebound and enjoyed their forth weekly gain in benchmark indices – DAX, Nikkei and the S&P500. Oil enjoyed the third weekly gain in a row, but struggling to break above the 40$/barrel. In fixed income, global rates on 2/5/10yr basis continues to be bid.

The events from last week point towards that the ECB has more or less lost the interest rate as a weapon to control the price stability and is now turning towards balance sheet measures to induce a pick-up in growth which will add inflationary pressure. Last week, the German consumer prices came out as expected, but lower than expected in Spain. This week, the main data point from the Euro zone will be the release of the February CPI on Thursday, where the headline is expected to come out MoM/YoY at 0.1%/-0.2% vs, -1.4%/-0.2% prior. Since the ECB is targeting an inflation level of 2.0% YoY, the current monetary policy has clearly failed and the market is doubting whether the new measures, implemented by the ECB, will assist in the getting the economy back on track. EUR/USD spiked on the news of no additional rate cuts and has sold off in the aftermath – support in the 1.1060/80-range and overall still caught in a wedge, meaning that soon, something has to give.

20160316 EURUSD.Daily

This week, we have important interest rate announcements from Japan and the US while the minutes from the BoE and RBA will be studied with great attention as well. In addition, there is an EU Summit in Brussels commencing on Thursday, where focus will be on migration. Draghi will be speaking and the markets will be looking for further monetary policy hints.

From the BoJ, we don’t expect any changes in the leading benchmark rate at -0.1% and USD/JPY has on a weekly chart confirmed a head-and-shoulders pattern, which gives a technical target around 106.30. From a fundamental point of view, the better than expected GDP figures last week has been a catalyst for additional risk taking and an increase in fixed income rates, which adds pressure on the Japanese Yen, hence the scenario is likely to materialise.

20160314 USDJPY.Weekly

For the US Dollar, the main event will be on Wednesday, where the FOMC is releasing interest rates as well as the forward outlook. Although we have witnessed a pick-up in activity, the question is whether or not this is strong enough for the FOMC to indicate a timing of a potential future rate increase. We would not rule out any additional negative surprises from the US economy and since Yellen also recently did not rule out potential short term negative interest rates, the US Dollar is also likely to stay on the offer unless we see a change in the forward guidance.

Of other important data points, we have the following:

Tuesday: JN Tertiary Industry Activity; US Retail Sales, PPI, Empire State mfg index; NZ Current Account

Wednesday: UK ILO Unemployment, Claimant Count; US FOMC, CPI, Industrial Production; JN Trade Balance; NZ GDP

Thursday: AU Unemployment Data; EZ Trade Balance, HICP; UK BOE Interest Rate Decision, MPC Minutes

Friday: CA Retail Sales, CPI; US Uni of Michigan Consumer Sentiment


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Posted on March 14, 2016 Posted in Uncategorized
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