Aside from a strengthening of sterling today, there has been very little movement in markets as caution has taken hold ahead of the ECB rates decision. Several of the major markets have developed a sideways trading band, especially the European equity indices, Euro/Dollar and latterly gold.
So what might be the impact of today’s ECB announcements. Well, I do not believe that too much will happen at 12:45BST when the rates decision is made. That is on the assumption that the ECB cuts the refinancing rate by 15 bps to 0.1% and also takes the deposit rate to negative (probably also by 15 bps to -0.15%). These are two moves that have been touted by the markets and are probably fully priced into markets now.
The big move could come at 13:30BST with Draghi’s press conference. The market is also expecting some form of liquidity assistance probably involving a Long Term Refinancing Operation potentially similar to the Bank of England’s Help to Buy scheme. However those who are looking for full blown QE should be disappointed today. However, Draghi may well talk about the prospects of a future programme of QE which might help appease markets.
Now Euro/Dollar is back at $1.3600 (almost 400 pips from the high during the last monthly press conference) Draghi cannot afford to let the Euro start to appreciate too much should he disappoint on QE. The other measures are largely priced in to the Euro now, so the risk is for a short covering Euro rally. Draghi will probably look to manage this by talking about QE.
Therefore (on the assumption that the ECB does not initiate a programme of QE) my expectation is that the Euro will not move too much on the decision at 12:45BST, but then start to rally around 13:30BST. However watch out for when Draghi talks about QE, with the likelihood that he will allude to future QE. This would probably curb the Euro advance and may even retrace some of the gains.
For equity markets there could be a series of near term corrections if investors are disappointed by the lack of QE, but again, this move could be curbed by talk of QE.
For gold there are conflicting forces at work. If there is no QE, then the Euro could stage a relief rally, which would be dollar negative and subsequently which would be gold positive. However, QE by one of the world’s major central banks would also be considered to be as theoretically a positive for gold, despite the move being Euro negative and dollar positive.