ECB expected to debate on QE exit – June 2018

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Orbex Market Review
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Speculators are likely to turn cautious on the euro currency heading into this week’s European Central Bank’s monetary policy meeting that will be held on June 14th. The ECB’s meeting comes just a day after the FOMC meeting. U.S. short term interest rates are expected to be hiked by 25 basis points as the markets brace for forward guidance to determine whether the Federal Reserve will hike rates two or three times for the remainder of the year.

For the euro, while the ECB meeting was expected to remain a non-event until earlier last week, that changed following after news reports showed that the central bank was considering the June 14 meeting as a “live meeting” on discussing the prospects of a QE exit.

Despite the hawkish headline, the report suggested that officials might not announce any decision. The report comes as the ECB has previously signaled that it would end its quantitative easing program in September 2018. The ECB is currently purchasing corporate and sovereign bonds to the tune of 30 billion euro a month.

The rumors raise the prospects that the ECB event could be uncertain until the central bank releases its monetary policy statement and the comments from the ECB President Mario Draghi.

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Earlier last week, the ECB President Draghi was scheduled to speak on Tuesday. However, this was canceled leaving the markets guessing. Economists were hoping to trim for clues from Draghi’s speech.

With a number of uncertainties looming, it is difficult to assess a decisive outcome from the ECB. On one hand, after a weak patch of inflation figures, the latest preliminary inflation data for the Eurozone showed that consumer prices increased in May.

Headline inflation rate was seen at 1.9% on a year over year basis in May. This was closer to the ECB’s 2.0% inflation rate. Core CPI also strengthened, rising at a pace of 1.1% on the year in May. This comes after core CPI fell to lows of 0.7% in April.

Despite the bullish headlines, the increase in consumer prices was seen coming due to higher fuel prices. The likelihood that inflation could ease once again after oil prices settle remains a question that officials will likely debate.

Meanwhile, the economic activity in the Eurozone continues to remain uncertain. After the Eurozone economy slowed to a pace of 0.4% increase on the quarter, officials expressed hopes that the economy would rebound in the second quarter. However, latest PMI reports suggested that growth across the manufacturing and services sectors remained bleak. This raises the prospects of another quarter of subdued growth in the region.

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Besides the economic uncertainty global concerns still remain. The U.S. administration had only last week implemented the trade tariffs on steel and aluminum prices on the Eurozone including Canada and Mexico.

EU officials reacted by taking the U.S. to the WTO and officials are said to be mulling over hitting the U.S. with retaliatory measures on trade. This increases the heightened risk of trade uncertainty that involves not just the U.S. and China but also the EU.

Heading into this week’s ECB meeting, it is quite likely that officials will remain tightlipped and keep investors guessing. While the recent political uncertainty from Italy had subsided, the fact that the new Prime Minister is backed by a coalition of the anti-EU parties raises the likelihood of further uncertainty.

After swearing in, the newly appointed Italian Prime minister maintained his support for the manifesto that included rejecting the Brussels/Germany backed austerity measures.

For the moment, the volatility is expected to remain in the euro as investors keep guessing on the next move from the European Central Bank.

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