January 23, 2020

The ECB Day

Safe Haven assets are popular among investors as Wuhan enters lockdown. In simple terms, investors are cautious, and the risk-on trade isn’t attracting any significant bids. As a result, gold, US Treasuries, and the Japanese Yen have been popular during the Asian trading session and a similar trend is likely to be seen in Europe. The reason for this is the outbreak of Coronavirus. The fact is that despite the lockdown, the number of victims is likely to rise before they start to tick lower, but yes, the lockdown of Wuhan will help the situation.

Today’s main event is the European Central Bank’s meeting. The single currency of the Eurozone, the Euro, has shown some sort of life against the dollar during the past few sessions. However, it is struggling to rally today. It is widely expected that the ECB will outline its strategic review today.

Deja Vue

The burning question on everyone’s mind is whether today’s ECB monetary policy announcement will ignite any fireworks in the currency markets? During the last meeting, the Euro skyrocketed simply because the Bank projected a more positive outlook for the economy. For traders, it was a clear sign that the bank isn’t likely to move a muscle with respect to any further rate cuts.

Moreover, the new president of the European Central Bank, Christine Laggard, did point out lower risk and signs of a mild pick up in core inflation in the Eurozone. Ever since, there has been improvement in economic activities such as better consumer spending and stronger inflation numbers.

Shaking Things Up

For traders, today isn’t about the ECB’s outlook of the Eurozone, they’re more focused on the inflation target and whether the Bank is going to move its needle on this. The ECB’s new president is interested in shaking things up hence her announcement of a review of the current strategy. As a consequence, the ECB could change its policy and if that happens, it would be the first time it has done so in almost 17 years. This exercise of soul searching is likely to examine the tools that are deployed by the ECB to achieve their goals.

From an economic point of view, the PMI data has improved and the uncertainty in the Euro zone has receded due to the signing of the Phase-one deal between the US and China. This constitutes the safety net which the Bank has talked about previously, and if this improves the GDP outlook, it would only reduce headaches for the president.

What Can Be Revealed?

Here is something that can be revealed in terms of the scope of the publication of the ECB:

Inflation target: Of course, the Bank is going to look at its definition of price stability. During their previous strategic review back in 2003, it was decided that the definition should be “below, but close to 2%”. Now, we are expecting this to be at 2%.  

The toolbox: This will be scrutinized. Negative rates and the process of asset processes have been criticized. Thus, the Bank will be looking at the pros and cons of this and if the composition of these assets making the desired impact. This includes the maturities of bonds as well as the types of fixed income instruments.

Climate change: This is closer to the president’s heart, and after the recent minutes of the meeting, it is evident that the governing council wishes to analyze the effects of climate change. This means that the ECB could include more green bonds in its asset purchase program.