ECB expected to engage further monetary easing


  • The big fundamental drivers of financial markets are looming large once more this week and there could be some serious volatility as a result. Oil seems to continue to be a constant now for guiding risk appetite, whilst after a quiet few weeks, China has returned squarely into focus as a key concern for investors as trade data showed exports falling the most since 2009. This is putting risk appetite on the back foot and the recent rallies on commodities is now being questioned. Ahead of the FOMC meeting next week, the European Central Bank will become the key driver of markets, with the ECB Governing Council expected to engage in further monetary easing.


  • What will Mario Draghi and the ECB do to ease monetary policy? Well it seems as though a cut to the deposit rate is a given. But by how much? Analysts seem to think that a 10 basis points cut is nailed on, however, perhaps the yield on the German 2 year Shatz (which is often taken to be an indicator for the deposit rate) tells us a different story. Back in December the Shatz yield was down at -0.45% prior to the ECB cut to -30bps, and this induced a sharp rally back to the new deposit rate at -0.30% on the Shatz. This time around the Shatz is yielding -0.55%, and so begs the question whether the bond market is pricing in a 20bps cut to the deposit rate?
  • Aside from that though, what else could the ECB do? It could put into place a 3 tier system on the deposit rate to help banks that do engage in lending.  The ECB is also expected to increase monthly asset purchases by between €10 to €20bn (adding €120bn to €240bn to the existing €1.5trillion program that ends in March 2017). Will the ECB extend the program by another 6 months? It could also extend the type of assets under purchase to include corporate debt too, although this is the least likely of the options.
  • The euro is set up far more neutrally this time around compared to December. The euro has basically been trading in a broad 1000 pip band between $1.0450/$1.1460 for the past year and is currently trading around the middle of that band at $1.1000. In December the market was positioned significantly euro short at $1.0550 and subsequently saw a huge short squeeze. The market seems to be more balanced into this ECB meeting and this will reduce the volatility on the announcement, whatever the Governing Council decides.
  • Moving to China, will this disappointing trade data for the world’s second largest economy de-rail the risk recovery? The reaction today has been solidly bearish to the disappointment of a 25.4% decline in exports but perhaps not as bearish as the reaction would have been just a few weeks ago. There are slight mitigating factors behind the data weakness with the Lunar New Year falling entirely in February this year causing a very short month. So perhaps it is more prudent to look at the Q1 data as a whole for a better comparison. However we recently had the growth target set at 6.5% to 7.0% with an increase in the budget deficit to 3.0% in an attempt to help manage the growth slowdown, so perhaps the market is not too spooked by this data today.


  • The rally in oil continues and the positive correlation to markets is also still high, with a correlation of around 0.75 against the FTSE 100 suggests that oil still has a big say in the direction of the markets. The oil price continues to rally and according to futures data, the net long position is the largest since records began in 2011. Does this suggest upside potential is becoming limited? Maybe, but the recovery has been built on improved sentiment surrounding the possible agreement between OPEC and Russia (which is again to be discussed towards the end of March). Also, although there is continued inventory build, US production has fallen for 6 consecutive weeks now to 9.08m barrels (according to the EIA)  whilst on the demand side China increased its crude imports by 19% in February, so perhaps the demand/supply imbalance is beginning to show signs of improvement.
  • The rising oil price also could have an impact on the Fed, as it should be a driver of inflation. Could this be a reason behind the Fed pushing tighter monetary policy? Vice Fed Chair Stanley Fischer noted yesterday about the first stirrings of inflation due to the strong labor market. It is too early for the rally in oil to start hitting inflation but it is an argument for the hawks. Fischer’s comments were though balanced to a certain extent by those of Lael Brainard who stayed the dovish course with a more cautious tone saying that the Fed needs to be sure that inflation is on course towards its target.
  • The ECB is not the only central bank set to announce monetary policy this week, with the Bank of Canada and the Reserve Bank of New Zealand both on Wednesday. Neither are expected to cut rates, whilst inflation will be the big theme. Especially the RBNZ is likely to guide the market by saying that further easing may be required in the coming months should inflation continue to struggle. There could also be comments over the strength of the Kiwi in an attempt to jawbone some Kiwi weakness. China is also again back in the spotlight on Thursday morning with the latest inflation data, something again which could have an impact on risk appetite.
  • Watch for: China inflation, ECB monetary policy



EUR/USD – The ECB policy will drive a breakout of the range $1.0800/$1.1050      

  • Despite the ECB being on the brink of further easing monetary policy, the euro has managed to embark upon a 4 day rally. The market seems fairly balanced in its expectation and does not seem to be too heavy in its expectations on Mario Draghi this time (one bitten, twice shy?). 10 basis point cut to the deposit rate and €10bn of extra QE per month seems to be fairly middle of the road and anything more or less could create the volatility.
  • Going into the meeting the euro has rallied to the $1.1050/$1.1100 pivot band. Medium term momentum is relatively neutral and the market seems to be fairly solidly set moving into the meeting. The ECB monetary policy will drive the movement in the coming days and potentially weeks.
  • Watch for: ECB monetary policy

GBP/USD – The psychological level at $1.4000 is now crucial

  • Cable is under pressure as risk appetite has started to correct on the back of the disappointing China trade data. Fed member comments from Stanley Fischer talking about the “first stirrings of inflation” are also dollar supportive in front of the Fed next week.
  • Rallies continue to be seen as a chance to sell and the 6 day rebound is now losing steam again at the 12 week downtrend. With momentum unwound to neutral this looks to be another chance for the bears.
  • Watch for: China inflation, ECB monetary policy

USD/JPY – Resistance at 113.50 now with pressure on 110.98   

  • The yen is beginning to gather strength again amid safe haven flows. This move is stunting the recovery. However both central banks announce monetary policy in the next week and this is sure to set volatility racing, with the likelihood of an easing bias from the BoJ and possibly hawkish signals from the Fed. This would pull the pair higher.
  • The recovery is being questioned as the price pulls sharply below the 23.6% Fibonacci retracement again and this turns into resistance now at 113.50. Deteriorating momentum indicators are also a concern. Support at 112.15 protect the key lows around 111.00.
  • Watch for: China inflation, ECB monetary policy, BoJ monetary policy (next week)

Gold – Bulls remain in control but for how long?

  • ETF buying seems to be supporting the gold price rally as the bulls eye the key $1306 high from January 2015.
  • The uptrends are all holding well and the sequence of higher lows suggests an appetite to continue the run. I remain a cautious bull with the somewhat (and arguably) disappointing momentum indicators. However the trend is your friend. The 6 week uptrend comes in at $1246.
  • Watch for: China inflation, ECB monetary policy

Oil – Long term bearish arguments are being broken

  • OPEC and Russia are set to meet between 20th March and 1st April according to the Russian oil minister, and this meeting will determine the sustainability of the recent claims of a production freeze. Oil inventories continue to drive volatility.
  • Oil has based out with breaking of the 21 month downtrend. A base on WTI implies $43.50. The near 4 week uptrend is now supportive at $35.40, with the breakout at $34.80 lending further support.
  • Watch for: EIA oil inventories, China inflation, ECB monetary policy

Indices – Correlation with oil still has a role to play   

  • S&P 500 – There is a medium term pivot around 2000 which is preventing the rally continuing near term and this is coming as the rally on oil has stalled today. The 30 day correlation between the S&P 500 and oil is now back up at almost 0.9 so once more oil is a huge driver of market sentiment.
  • DAX Xetra – The 61.8% Fibonacci retracement at 9897 has played a role again and dragged the DAX back to test the confluence of support at 9600 and the recovery uptrend. A breach would re-open the 76.4% Fib level at 9308, but holding on means that the bulls would once more eye 9897. A key pivot again.
  • FTSE 100 – The significance of oil for FTSE 100 direction remains crucial with a 30 day correlation of 0.75. Is the FTSE 100 going to once more fail in the rally up at 0 on the daily RSI. So many times in the past few months this has been the case and another failure would be a real blow. However, for now this is just a consolidation with the support band 6065/6115 being tested. Key resistance at 6315, the late December high.



Wednesday 9th March

  • UK – Industrial Production
  • Canada – Bank of Canada monetary policy
  • US – EIA Crude Oil inventories
  • New Zealand – Reserve Bank of New Zealand monetary policy

Thursday 10th March

  • China – CPI & PPI
  • Eurozone – European Central Bank monetary policy
  • US – Weekly Jobless Claims
  • US – JOLTS job openings

Friday 11th March

  • UK – Trade Balance
  • Canada – Unemployment


N.B. The US time shift to Daylight Saving Time

Monday 7th March

  • None of any note

Tuesday 8th March

  • Australia – RBA meeting minutes
  • Japan – BoJ monetary policy
  • US – Retail Sales
  • US – PPI
  • US – Empire State Manufacturing
  • US – NAHB Housing Market Index

Wednesday 9th March

  • UK – Unemployment and Average Weekly Earnings
  • UK – Annual Budget speech
  • US – Building Permits & Housing Starts
  • US – CPI
  • US – Industrial Production/Capacity Utilization
  • US – Crude Oil inventories
  • US – FOMC monetary policy
  • New Zealand – GDP

Thursday 10th March

  • Australia – Unemployment
  • Switzerland – SNB monetary policy
  • Eurozone – CPI (final)
  • UK – BoE monetary policy & meeting minutes
  • US – Philly Fed manufacturing
  • US – Current Account
  • US – Weekly Jobless Claims
  • US – JOLTS job openings

Friday 11th March

  • Canada – CPI
  • US – University of Michigan Consumer Sentiment (prelim)
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