ECB preview: cautious tone to predominate?
While the ECB hoped to move towards higher interest rates this year, the dip in economic data, and potential further disruption due to Brexit and trade wars, suggest it will have to stick to its dovish and accommodative policies.
Eurozone economic data continues to point towards the increased possibility of a recession in the bloc. German gross domestic product (GDP) growth for 2018 was the weakest in five years, slowing to 1.5% year-on-year versus 2.2% in the previous two years. The decline in the overall eurozone purchasing managers indices (PMIs) have been stark, with a straight-line move in manufacturing reading from near 60 in January 2018 to 51.4 in December. While still in expansion territory, this slowdown should worry policymakers. Services declined too, from 58 to 51.2 by the end of the year.
The employment picture is better, but as ever the eurozone average masks the wide divergence between northern Europe (i.e. Germany) and everyone else - in Germany the rate is 3.3%, versus 14.7% for Spain.
This weakness in economic data has run a coach and horses through the European Central Bank's (ECB’s) plans to start raising interest rates this year. While it managed to halt the quantitative easing (QE) programme (although reinvestment of the proceeds continues), it seems unlikely at this stage that the ECB will be able to join the Federal Reserve (Fed) in raising interest rates.
Recent commentary from ECB president Mario Draghi, designed to allay fears about a sudden shift to hawkishness, underscores this point. Draghi was keen to stress that a recession had been avoided, but that the slowdown could go on longer than had been expected.
Investors should be prepared for the ECB chief to follow up on these comments with a cautious outlook, designed to emphasise the better economic situation in Europe compared to a few years ago, while calming fears that the bank would move too swiftly to tighten policy. However, a change to language seems premature, with a commitment to leave rates unchanged 'at least through the summer of 2019' likely to remain a fixture for the time being.
EUR/USD has pushed steadily higher since November, forming an upward channel. The top end of this was tested in mid-January, and then a pullback saw the pair return to trendline support and the bottom end of the channel. This recent weakness might suggest upside surprises for the euro if Draghi leaves things broadly unchanged. A close below $1.13 is needed to suggest a new substantial leg lower for the pair.
This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
See an opportunity to trade?
Go long or short on more than 16,000 markets with IG.
Spread bet and trade CFDs on our award-winning platform, with low spreads on indices, shares, commodities and more.
Live prices on most popular markets
You might be interested in…
Find out what charges your trades could incur with our transparent fee structure.
Discover why so many clients choose us, and what makes us a world-leading provider of spread betting and CFDs.
Stay on top of upcoming market-moving events with our customisable economic calendar.