Interest Rate Decisions: Fed & ECB

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Coming up we have a really busy week for the markets, and we could expect to see increased volatility for several reasons.

We go through the thick of the highly anticipated earnings season, with a little over a third of the largest companies in the world reporting. Also, on Thursday we expect a rash of corporate updates from China, which will give us a very clear picture of the real impact of the pandemic on the world’s second-largest economy.

In the middle of that, we have three key interest rate decisions. And, what’s likely to be more important are the monetary policy statements that come with them.

So far, most central banks have pledged virtually unlimited QE to deal with the pandemic. The ECB went so far as to allow buying junk bonds. And there isn’t much more that they can do!

So, we aren’t looking for a change in current policy so much as clues as to what they expect to do in the future.

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The Fed

There is a pretty broad consensus that the Fed will simply stay the course in their second scheduled meeting of the year. Some speculate that Powell will want to project an image of calm.

On the other hand, there isn’t all that much more they can do to prop up the economy. Asset purchases in the last two weeks have far exceeded the levels of the entire GFC period (not including the continued QE during the slow growth period that followed).

At this point, what everyone is looking for is guidance from the Fed. More specifically, we want to know when they are going to slow down the money presses.

We’re not expecting this at this meeting, but we should keep an eye out for comments from Chairman Powell about how long the Fed expects the recession will last.

This can give us some insight into when they expect to announce that they are planning to taper purchases and remind everyone of the last “taper tantrum”.

Euro Area

President Lagarde has shown frustration at the EC’s slow action to shore up the EU’s economy. There is still a pending agreement on how to finance stimulus plans, with leaders of the common area expected to keep meeting through the week.

The ECB is likely going to have to make their policy decision without any clarity from European leaders on what will be done to support the economies that are expected to start opening up next week.

The consensus is for the rate to stay the same, as well as the amount of asset purchases, currently set at €750B by the year-end. There is quite a bit of expectation that the amount will be bumped up to €1.0T, with only a small number of analysts predicting it will happen on Thursday.

As with the other banks, the main interest will be the press conference after the meeting to see if we can parse some guidance out of the President’s comments.

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