Good morning,

The table is set

Set for what you may ask? And to be honest, nobody really knows. Economists and strategists, traders and investors have a consensus view of what is expected from the European Central Bank this lunchtime but the level of surety with which those predictions have been made is pretty low.

Consensus sits at a cut of 10-15 bps to the already record low deposit rate and another EUR10-15bn of asset purchases and my expectations are broadly that, although I think that more good work could be done via a larger cut in rates.

The euro is the European Central Bank’s preferred transmission mechanism for dealing with its economic issues; lower euro means rising inflation and rejuvenated exports. Both sterling and the US dollar have had periods of weakness that has enabled them to deal with their own economic malaise and this is the turn of the euro. It stands out so much because of the divergence around rate expectations.

Things to watch for

Away from a cut in interest rates and additional QE spending there are a few other things that we need to be mindful of. Negative interest rates have hammered bank profits in the past year, and while nobody is crying for the financial sector, a tiered negative interest rate system would shift some of the onus away from banks and allow for further cuts into negative territory. That could prove to be a positive surprise.

Secondly we must be on the lookout for the staff projections that form part of the policy analysis. Inflation in February dipped into negative territory and a wobbling core has raised concerns that the weakness is not solely down to oil prices.

Lastly, markets are not ones to easily forget when they have been burned and the prospect of a disappointment is high. Every time, apart from December, we have doubted Draghi’s ability to beat expectations and knock the euro lower, he has come through. Today’s expectations are the highest that have ever been set and the press conference will have to do a lot of the heavy lifting in the absence of a stronger cut to the deposit rate than is forecast.

Volatility is almost assured

Our hopes are therefore that the European Central Bank is at least imaginative when it comes to its policy. They could buy oil, bank debt, non-performing loans or other financial assets in a bid to stimulate the economy. I doubt that they are ready for that quite yet and to be honest there is no guarantee that any of this will work

The decision is due at 12.45pm GMT with the press conference at 1.30pm. Things are going to get volatile.

Elsewhere

It’s easy to get myopic when we have such a hufe amount of event risk in one trading day but overnight news has been interesting. The RBNZ surprisingly cut interest rates overnight to fresh record lows and the accompanying statement suggested that the central bank was more and more concerned about external headwinds affecting NZ growth and inflation. NZD is down 2% overnight and we expect further losses as additional cuts are made in the coming quarters.

We do not think that the cut in New Zealand triggers fears of a cut in Australia or Canada in the short term however. Both have been helped by rising commodity prices as opposed to falls in milk prices hurting New Zealand whilst AUD and NZD have benefited from more stable inflation readings.

Have a great day.

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