Markets are consolidating ahead of some major risk events throughout the next seven days. The ECB monetary policy is highly likely to be an historic event which could drive the outlook for the euro in the coming months. We also see US growth on the agenda, but we will also see what sort of vision Donald Trump has for the FOMC as he identifies the next Fed chair. We look at how the outlook for forex, equities and commodities will be impacted.
Having started the year around $1.05, the euro is now over 12 big figures higher against the US dollar, strengthening just under 12% in 2017. This has come as the prospects for the Eurozone economic activity have improved significantly (avoiding an almost annual Greek crisis seems to have helped) with inflation expectations also having improved. With rhetoric from the ECB having become significantly less dovish in recent months markets have been speculating over whether the Governing Council would start to significantly step away from its ultra loose monetary policy. The ECB policy normalisation would come in a series of steps: End the Asset Purchase Programme (APP, i.e. quantitative easing), end the negative rates policy (with the deposit rate currently at -0.4%), raise the main refinancing rate from zero and then begin to reduce the balance sheet. We are edging closer to step one of normalisation. The current APP of €60bn per month ends at the end of this year, however, is expected to be extended. At the ECB meeting this week, markets are expected to hear that this extension will be tapered to €30bn per month. How long for is the key. The middle of 2018 would be considered hawkish, with September being a consensus (€270bn over 9 months). The euro be pressured if the ECB cuts the APP by less than expected to €40bn per month and does not specify an end date. With the dovish Mario Draghi at the helm this is a risk.