HomeContributorsFundamental AnalysisNo Fireworks at ECB Meeting, but PMIs Could Drive Euro

No Fireworks at ECB Meeting, but PMIs Could Drive Euro

The European Central Bank (ECB) will conclude its policy meeting at 12:45 GMT on Thursday, and a press conference will follow at 13:30 GMT. If there is any change in tone from the ECB, it might be towards a slightly more upbeat narrative, though any major market reaction seems unlikely. Rather, the euro’s near-term direction might depend on the quality of the bloc’s latest PMI data, which are due at 09:00 GMT on Friday.

ECB sidelined, but perhaps a slightly more upbeat tone

The dark clouds hanging over the euro area economy cleared somewhat towards the end of 2019, with the bloc’s PMI surveys suggesting that economic growth was finally stabilizing after a dramatic slowdown, helped by a de-escalation in trade and Brexit risks.

Alas, growth bottoming out is not the same thing as growth picking up. Yes, growth is no longer slowing down, but it has stabilized at a very low level, so there isn’t much to celebrate. Meanwhile, there’s always the threat of US President Trump imposing tariffs on European cars – especially now that he has a truce with China.

All this argues for a steady-as-she-goes stance, where the ECB keeps its easing bias in place. If there is any change in tone, it might be towards a less dovish one. Even in that case though, any upside reaction in the euro is unlikely to be large, as the ECB probably won’t make any material shifts without clear and sustained improvement in the data.

Strategic review roll-out

With major policy signals looking unlikely, investors could instead focus on the official launch of the ECB’s policy review. During this exercise, the central bank will review its strategy, appropriate tools, and communications approach.

The most market-relevant change would be a modification of the ECB’s inflation target, which is currently to keep inflation “below, but close to, 2%”. For instance, is it better to have a simple 2% target like the Fed does, or is a target range of say 1.5% – 2.5% more appropriate because it grants flexibility?

Although we won’t get any clear signals this week, as the review is just getting started, investors will still scrutinize President Lagarde’s comments for any indication as to which direction the Governing Council is leaning.

But PMIs could be the real driver

A much bigger force for the euro’s overall direction this week may be the preliminary PMIs for January, due on Friday. The ECB pays very close attention to this data set, as it is released before official figures.

Forecasts point to a slight uptick in most figures, which would signal that the Eurozone economy is gaining momentum, albeit very slowly. Still, that would be encouraging and if met, such prints could help establish a floor under the euro. Otherwise, another disappointment could dampen expectations that the ECB will drop its easing bias soon, pushing the single currency back down.

The French and German figures will be released earlier, at 08:15 and 08:30 GMT respectively, and any market reaction could begin with them.

Euro outlook still bleak

In the big picture, the outlook for the euro remains clouded. The economy is barely growing, the manufacturing sector is still contracting, and there’s little prospect of the ECB reducing its massive stimulus dose anytime soon. The euro will therefore remain a funding currency for carry trades.

For this narrative to change, a large fiscal spending package is needed to boost growth. Sadly, the only major economy with fiscal room is Germany, and Berlin has shown no indication that it intends to relax its tight spending stance. Until – and if – there are clear signs such a package is on the way, it’s difficult to envision a sustained rally in the euro.

Looking at euro/dollar technically, if the bears break below the intersection of the 1.1085 zone and the tentative uptrend line drawn from the October low, their next target may be the 1.1040 region.

On the upside, the bulls could stall first near the 200-day simple moving average, currently at 1.1133. If they overcome it, the 1.1170 resistance area might cap advances.

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