How much for the Fed and what for the ECB? - Commerzbank

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Nov 20, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Córdoba) - In the coming week, discussion on the FX market will mainly again revolve around how the Fed and ECB are likely to proceed. According to Thu Lan Nguyen, analyst at Commerzbank, while in the USA, the focus will be on the inflation data, investors in the eurozone are likely to be hoping for signs from the central banks themselves.

    Key Quotes

    “Since the strong labour market report for October, the market has largely priced in a first interest rate hike by the Fed in December. As a result, USD appreciation has recently started to falter”.

    US data up to the December meeting would have to be hugely disappointing to trigger renewed market doubts about the lift-off. Rather, the focus is increasingly on the question of what will happen after that. FOMC members are not tiring of stressing that the key interest rate will be raised in this cycle at a much slower rate than in earlier cycles. Consequently, only two further rate hikes are being priced in by the market for 2016. Ultimately, the pace of rate hikes will largely depend on how the economic data turn out”.

    “The figures due next week on the private consumer spending deflator (PCE), the Fed’s preferred yardstick for inflation, should also give an indication of how quickly the next rate hike could follow after lift-off in December. One thing is clear: the stronger the inflation pressure, the faster the Fed has to increase interest rates. Therefore, if prices rise at a sharper rate than expected, this should give considerable impetus to inflation expectations for the coming year and thus also to the US dollar. On the other hand, a weak result would merely confirm the already very moderate market expectations at present.”

    While the question of “how much” is dominating the discussion in the US, it’s more about the question of “what” in the euro zone. What will the ECB decide in December? ECB chief Mario Draghi pointed out after the last meeting that the ECB can further loosen monetary policy in various ways. One option is an adjustment of the bond buying programme; another option is to lower the deposit rate.”

    “Next week, ECB Governing Council members will have their last opportunity before the meeting in the following week to make a statement on the measure they prefer. Depending on how cautious or aggressive they are, this could trigger some strong movement in EUR exchange rates".

    "In the medium to long term, however, their target will definitely be to weaken the EUR in general to create inflation. Consequently, any possible recovery in the EUR will not be sustained.”
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