This week, focus among investors
has been on Europe where Brexit negotiations are taking place. The World Economic
Forum (WEF) is also taking place in Switzerland while in France, talks to end
the yellow jacket protests are ongoing. Today, investors will pay a close
attention to Brussels, where the European Central Bank (ECB) may be making the
first monetary policy decision of the year.
Today, the ECB will release its
interest rates decision. While the bank may not hike, traders will be focusing
on the statement that will come from the meeting. Most importantly, they will
focus on the following.
First, they will want to know
when the ECB plans to start hiking interest rates. As you recall, in 2018, the
bank said that it would start raising rates ‘through summer’, which is a
relatively vague statement. The bank failed to state clearly when this period
was. In this meeting, traders will want to know whether the bank plans to move
ahead with the plan. If it does, they will want to know exactly when that will
happen. In recent surveys, investors believe that if tightening happens, it may
be in October.
Second, they will want to know
the progress on quantitative easing. The bank ended the QT program in December
last year. As such, traders will want to know the plans ahead about how the
bank intends to reinvest the funds. As you recall, the QE program entailed
large asset purchases, which were worth more than $2.5 trillion. The question
that most investors have is that if QE was a good thing for the economy, why may
QT not be bad
Third, they will want clarity on
the recent statements by Mario Draghi who was quoted saying that the economy
was weakening faster than they had projected. If this is the case, traders will
want to know why the bank intends to tighten at a time when the economy is not
doing well. On Monday, a report by International Monetary Fund (IMF) lowered
the global economic forecast for the year. A slowing economy makes it difficult
for any central bank to tighten. In this, Draghi may likely say that there is
enough time to assess the data.
Finally, they will want to hear
the inflation guidance from the ECB. In recent weeks, the inflation in the
region has been closer to the 2% target of the ECB.
Other than that, traders will
focus on key economic data from Europe. Germany will release the manufacturing
PMI data that is expected to show a reduction to 51.3 from the previous 51.5.
For the region, the PMI is expected to remain unchanged at 51.4