ECB preview: Draghi to drive euro weakness

Thursday sees the European Central Bank (ECB) return to the forefront of investor’s minds, and whilst we are seeing little to tell us that we will see a shift in policy from the central bank, market volatility is likely to be heightened once again. The deterioration in data over recent months has much to do with the demise of US-EU relations, with targeted tariffs on products such as German cars meaning that business (and confidence takes a hit, in turn impacting investment. Consumer behavior is also likely to be affected, with employees in those affected industries expected to refrain from large purchases given the uncertainty over their employment. The economic decline in the eurozone has been evident throughout the first half of the year, with expansion in services and manufacturing sectors slowing through much of that six-month period. Interestingly, today’s purchasing manager’s index (PMI) surveys have seen a significant shift in that trajectory, with a sharp rise in German manufacturing in particular providing a welcome boost. Today’s figures showed a steep rise in input prices, with Chinese imports likely to drive up inflation.

The inflationary impact of tariffs on Chinese goods could have an impact on eurozone consumer price index (CPI) going forward, potentially putting pressure on the ECB. With the headline rate standing at 2%, it is clear that the committee is mainly focused on the economic anxieties over price pressures for now. Much of that rise in CPI has been attributed to rising energy prices, which are unaffected by ECB monetary policy. Therefore perhaps the focus should be upon the core reading, which ticked lower to 0.9% this month; some way off the 2% target. With the ECB’s preferred measure (5y5y inflation swap) is somewhere between 1.7% and 1.8% for the past year, there is little pressure on Mario Draghi, president of the ECB, to act.