Research Note: March ECB Preview
- Summary Outlook
- Maket Forecast
- Price Chart
On Thursday 7th March the ECB is scheduled to announce its latest interest rate decision. The decision will be released at 1245 GMT/ 0745 ET. No change in interest rates or additional policy measures is expected, however we will get the latest ECB staff forecasts for growth and inflation. At 1330 GMT/ 0830 ET, the ECB President Mario Draghi will hold his monthly press conference to explain the Bank's decision.
Draghi will deliver his press conference to a backdrop of continued uncertainty about the outcome of the Italian election, further weakness in Eurozone economies, particularly in the struggling periphery, and a steep sell off in EURUSD since the last meeting.
We think the ECB won't react to the Italian election and will instead say that it is a domestic matter. There are two reasons for this: 1, the ECB is unlikely to loosen monetary policy or adopt new policy measures to ease pressure on the peripheral economies without knowing whether or not the next government of Italy will stick to reform pledges or even if it wants to remain in the euro. 2, Italian bond yields remain well below the 6.5% highs from mid-2012 even with the election uncertainty, which may be down to the ECB' OMT programme. Although not yet activated, the OMT has helped keep borrowing costs relatively low for Spain and Italy even during this political upheaval. Thus, the Italian situation does not require action from the ECB at this stage, in our view.
The growth outlook is still dismal for the currency bloc. The manufacturing and service sector PMI remained in contraction territory in February for the 12th month, and actually declined further last month relative to January. The ECB staff forecasts are also released at this week's meeting, which will provide us with inflation and growth forecasts for the next 2 years. We expect these forecasts to mirror the European Commission forecasts, which predicted inflation at 1.6% and 1.4% this year and next and growth to contract by 0.3% this year. The inflation forecasts are the most worrying, as 1.4% for inflation next year could justify further ECB easing. The trouble is that growth is not even across the currency bloc. In Germany it is strong; in Southern Europe it is weak. Thus, rather than target a rate cut to try and boost growth the ECB may instead prefer to provide extra loans to struggling Eurozone banks - maybe in the form of LTRO 3 - or further ease collateral rules for the weakest banks to ensure they have access to liquidity. We don't expect any policy action like a reduction in collateral requirements at this meeting, as requirements are already low and it could cause some concern around the quality of assets residing on the ECB's balance sheet. Thus, although growth remains weak, there has been no marked deterioration in the growth outlook in the past month, which does not support fresh policy support from the Bank.
Interestingly, the biggest risk to the markets from the ECB in recent months' has not been from changes to policy, instead they have come from Draghi's own rhetoric. Last month he mentioned that the strong euro could cause downward pressure on inflation that could prompt the ECB to take action. EURUSD has declined 700 pips since then and Draghi called a top in EURUSD at 1.3770 - the early February high.
The strength of the euro is a concern for the ECB due to its impact on growth as well as inflation, and a weak currency may be one of the conditions necessary to drag the Eurozone's economy out of its current malaise. Thus, we think that Draghi will be careful on Thursday not to say anything that could promote a rise in the single currency. He may choose to say that the ECB remains vigilant to the threat of deflation and is watching growth signals closely.
We think that the euro's reaction to this week's meeting will be less violent compared with the February meeting. Some shorts may be reversed in the absence of a rate cut or policy action by the ECB and in that scenario we may see a relief rally in the single currency. The daily RSI (see on the chart below) is also starting to look oversold, which may suggest that selling pressure could start to ease off in the coming days. However, we tend to think that gains will be limited. 1.3115 - the top of the daily Ichimoku cloud - and then 1.3250 are key resistance zones to watch out for in the coming days. In the medium-term we think the euro may drift below 1.30, and any strength on the back of the ECB not delivering a rate cut at this week's meeting could be used to sell into. Support lies at 1.2850 - the 200-day sma.