Release: EUR Interest Rate Decision
Consensus Forecast: 1.0%
Date/Time: 04/04/12 7:45 AM EDT (11:45 GMT, 12:45 BST)
ECB Press Conference
Date/Time: 04/04/12 8:30 AM EDT (12:30 GMT, 13:30 BST)
Draghi To Urge Governments to Use Respite From Crisis Wisely
In the previous ECB meeting President Draghi touted the soothing effects on the market of the LTRO loans. While it certainly helped to stem the credit crunch that was facing the European banking system and helped to ease yields on Spanish and Italian debt what it mainly did was give time for governments to re-balance their economies and repair their balance sheets.
The focus this time around might be on putting pressure on governments to make sure that they use the respite from the crisis wisely in pursuing these goals. Because of strong disagreements on the ECB Governing Council, led by Germany's central bank president Weidmann, it's unlikely that Draghi will offer further easing either monetary or liquidity in the near-term.
Market participants will also look for any hints of exiting the non-standard measures that the ECB has taken up including perhaps a tightening of collateral eligibility rules, though such a move is not expected in this meeting. Instead, Draghi and the ECB will continue to assess the impact of the recent LTRO loans and convey a steady as she goes approach.
With the problems seen in Italy and Spain recently, exiting non-standard measures at this juncture is not a message that will go over all that well with market participants. He will be asked about it during the Q&A as the threat of excess liquidity could lead to heightened inflation and asset price bubbles. Draghi will likely sound relaxed about risks at this stage and to convey that the ECB has the tools to detect and counter their emergence.
Inflation Ties ECB's Hands
The ECB is also caught between a rock and a hard place as it's likely to sound less optimistic about the growth outlook considering the steep austerity measures that countries, including Spain and Italy are undertaking and the possibility that these efforts will cut into growth deeper than anticipated.
See our article on the subject: EUR - Can Concerns Around Spain and Italy Derail the Euro in 2Q?
While the ECB in normal times might try and signal possible rate cuts as and elixir to poor growth, in the current environment we see high inflation as a result of the ramp-up in oil prices the last few months which will likely keep the ECB's hands tied in terms of loosening monetary policy.
With a weaker growth outlook, but less chance that the ECB's response will be to lower interest rates (in the near term at least) or to provide another set of liquidity measures, the market is likely to react by selling the EUR as market participants have become accustomed to central bank largess.
ECB Likely to Look Comparatively More Dovish Than FOMC Following Fed Minutes
Now, the EUR has already come under selling pressure in the Tuesday trading session following the FOMC meeting minutes, as the market has interpreted them to mean that the Fed is less likely to undertake another round of quantitative easing. While the ECB is unlikely to signal it this meeting analysts and economists do expect the ECB to cut rates at least one more time by year's end in order to help the economy, however they would have to wait until inflation pressures ease to do so.
Overall then the ECB will likely be seen as comparatively more dovish than the Fed and that will undermine the EUR against the USD and could set a weak tone for the EUR for the next few weeks, especially if the momentum in the US economy persists. That could mean a further pullback in the pair, with a downward target of 1.3015.
We'll be following the ECB press conference live in our Wednesday Market Intelligence Briefings.
Nick Nasad is a macro economist, market analyst, and educator; and one of the main contributors to FXTimes.com - provider of Forex News, Analysis, Education, Videos, Charts, and other trading resources.
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