Summary:
- ECB expected to sit on its hands at today’s meeting with no changes expected to key rates
- ECB likely to wait and assess the impact of Brexit before making any changes to monetary policy
- ECB could address the issue of the bond purchases in light of many yields falling below the eligibility criteria
The European Central Bank will be meeting later today at 1145GMT for the monetary policy meeting. The ECB is expected to leave monetary policy unchanged at today’s meeting, with the ECB’s deposit rate facility standing at -0.40% while the main refinancing rate at zero percent. The ECB’s 80 trillion euro a month sovereign bond purchase program is also expected to remain unchanged.
The monetary policy is likely to mirror that of the Bank of England which held rates steady last week but said that further policy decisions could be made in August. With the UK’s vote to leave the EU affecting both the UK and EU, chances are that the ECB will likely buy time to assess the economic impacts of Brexit before deciding on the future course of monetary policy action.
In light of no changes to monetary policy, the markets will be looking to the ECB’s press conference which starts at 1230GMT. ECB President Mario Draghi will be expected to give forward guidance and also detail on its recently implemented Corporate Sector Purchase Program (CSPP) and the TLTRO-II auctions.
More importantly, the ECB is expected to address the concerns regarding the eurozone bond purchase criteria. Under the current conditions laid out by the ECB, the central bank is allowed to only buy sovereign bonds that have yields above the deposit rate facility of -0.40% besides the fact that the size of bond purchases should match the size of the member state’s economy, Germany being the largest.
Under the current set up, the ECB is expected to run out of eligible bonds by the turn of the year. The 10-year German bund yields have fallen into the negative while the longer term 30-year bund yields are trading at 0.49% yield.
Overall, the current impact of bond purchases is already having a negative impact on the ECB’s balance sheet. Bond yields continued to plunge following the Brexit vote as investors sought safety in the safe haven of government bonds, indirectly putting over 50% of the bonds out of reach from the ECB’s bond purchases.
In this aspect, today’s ECB monetary policy will more likely be of technical importance. Still, the ECB could be seen maintaining its view to continue running its bond purchase operations until the central bank meets its inflation target of 2.0%. The current scope of QE purchases are expected to run until March 2017, which could also be extended.
The most recent inflation data out of eurozone, released last week showed that the headline CPI grew at a pace of 0.10% on a year over year basis in June, reversing the 0.20% declines in May. The core CPI which strips out the food and energy prices was recorded at 0.90% on a year over year basis, slightly higher than 0.80% core CPI recorded in May.
Richard Barwell, economist at BNP Paribas Investment Partners puts it succinctly, “Uncertainty over how the ECB will tweak the rules in future and scepticism that it will run out of bonds to buy serve no positive purpose. Clarity now would be the perfect soft signal that officials are considering extending the programme beyond March 2017.”
EURUSD (1.102) – Technical Outlook
After hitting lows below 1.10, EURUSD has been trading in a range, bouncing off 1.10 support and 1.115 resistance. Yesterday, EURUSD posted another brief dip to 1.10 before pulling back off the day’s lows at 1.0981 to close at 1.101. For the upside to prevail, EURUSD needs to break above 1.110 which now remains as an intermediate resistance level. The Stochastics points to a bullish divergence, which could see EURUSD correct to 1.120, which remains a key resistance level that is yet to be challenged. Further upside above 1.120 can be expected only if support is clearly established at 1.110. To the downside, a breakdown below 1.10 could see EURUSD extend its declines towards 1.09
