Answer to the key question - "Will ECB add further monetary stimulus or not?" could earn you millions if you get it right with sizable exposure. However price action, surrounding EUR/USD are suggesting traders aren't so sure of what ECB would actually do.
As a matter of fact, we at FxWirePro fundamentals, are having a great deal of arguments and debate over the matter. So we though what could clear out some confusion would be a comparison of conditions prevailing now and then.
Last time European Central Bank (ECB) took concrete actions was back in December 3rd, but that fell well short of expectations. Next in January ECB promised to reevaluate and POSSIBLY readjust policy.
For 'then', we are taking December 3rd, which could serve as a nice comparison benchmark, more so because it is prominent in the memory of traders as well as central bank policymakers and that was the last time ECB evaluated and adjusted policy.
Back in 3rd December, European blue chip index, EuroStxx50 was trading at 3370 area and now it is around 3000, so it is down a bit more than 10%. However it is important to note that when ECB met in January 21st, EuroStxx50 dropped to 2840 on the previous day and compared to the bottom made in February 11th, market is up more than 12% so far.
Euro is considerably higher, compared to December. Back then Euro was around 1.055 against Dollar and now it's trading at 1.103 against Dollar. However Euro is not a direct policy parameter.
Market based measures of inflation expectations have risen sharply in recent times in both side of the Atlantic.
Industrial metals have recently moved up sharply. In ECB's last meeting in January, Copper was hovering around $1.95/pound and today it is trading more than 15% up at $2.25/pound.
A day before ECB's last meeting in January, WTI benchmark was at $28.3/barrel and now it's up 46% from its February low around $26.3.
Since manufacturing data in Europe has portrayed weakness, whereas services sector still strong.
European unemployment has dropped to 10.3%, best figure since 2011, but still a lot of scope for improvement.
Back in December inflation was positive at 0.2% but in January the region again has fallen back to deflation at -0.2%.
Concerns regarding Chinese Yuan has abated. Back in December meeting Yuan was around 6.44 per Dollar and in January it was 6.61 per Dollar. Compared to these Yuan is currently at 6.51 per Dollar.
Looking at all these, we feel, it is really up to the policymakers whether to act now or wait further.
Hawks are likely to point towards higher commodity prices, BOJ example (failure of action to weaken Yen) and rising inflation expectations, ongoing equity market and oil price recovery.
Doves are to argue that inflation reading dropped to negative, core inflation weakened, lot of improvement yet to happen in terms of both growth and inflation, not acting might strengthen Euro.
We expect,
ECB, to not to fire any big bazooka, even if it acts.
ECB, not likely to introduce further negative rates. Time line likely to remain at current level of March 2017.
So any further accommodations might be in tune of €10 billion per month increase in asset purchase.
Without any big bazooka, it is not taking the Euro risk and it is better to wait in the sideline and wait for the policy announcement before acting.
Euro is currently trading at 1.103 against Dollar. Key support at 1.095, 1.08 and resistance lies at 1.107 and 1.137.
