58 views

The ECB Day Is Here

The ECB Day Is Here

Stock futures in the Eurozone and the US continue to trade on the downside, and investors and traders are picking up the momentum they left off yesterday. Regarding their concerns, the very same issues, such as slower economic growth and higher inflation, are weighing their decision when it comes to back riskier assets. Traders and investors need to pay attention to one crucial factor: filtering out the noise from the news, and by this, what we mean is the price action of the volatility index, the VIX index. If we look at the price action of the VIX over the past few weeks, it is clear that the index is trending to the downside. This begs the question of whether the odds of stagflation, a real concern among traders, are still strong and why the VIX index is moving lower. Suppose investors and traders are pessimistic about the stock market or riskier assets. In that case, we should see a continuous upward move for the VIX index, which is not what we are witnessing currently. However, it is essential to point out that the VIX index is still trading above the $20 price mark, which is a critical support for the index, and this means that the volatility index can take off at any time.

Commodities: Gold and Oil 

The precious metal has been experiencing a lacklustre move over the past few days, and the reason is that traders and investors are waiting for two things. Firstly, the ECB’s monetary policy decision is due later. An overly hawkish stance by the ECB could trigger a turmoil in the European bond yields, and this means that we could see more birds coming for the yellow metal. Secondly, the US CPI number which is due tomorrow. Many expect that this number has reached its peak level, and if that is the case, then the Fed is likely to stay on autopilot concerning their monetary policy, and we could see higher moves for the gold price.

As for the black gold, the only thing that matters the most is what will happen to the oil supply when China entirely comes back in terms of its economic activity. This is the message we also heard from some members of the OPEC yesterday, and this remains a wild card for the oil market. Due to this, traders and investors believe that it is likely that we may see oil prices remain anchored for an extended period. Oil prices can only ease off if we see the price of Brent and Crude breaking below the critical level of $100, which seems unlikely for now.

Bitcoin 

Although bitcoin price continues to struggle to move higher or find its mojo, the on-chain data suggests that big money has started to bag bitcoins while it is cheap. There is no doubt that institutions have a vast interest in this space, and it makes sense for them to get involved in this space while things are cheap.

ECB Meeting 

Today is an important day for the European markets as it is today that the European Central Bank will come into the spotlight. The ECB, which sets the monetary policy for the Eurozone, will announce its monetary policy decision at 11:45 AM GMT, and traders and investors will closely watch its decision. There is no doubt that there is tremendous pressure on the President of the European Central Bank, Christine Lagarde, to adjust the monetary policy of the Eurozone as inflation is running red hot.

The President of the ECB and several other members of the governing council have indicated that the time has come for the bank to end its notoriously famous dovish monetary policy and start bringing the interest rate back to its normal. However, the bank also needs to pay attention to two critical factors before adopting a hawkish monetary policy stance. Firstly, the weakness in the Eurozone economic data, especially in Germany, its most significant economy in the Eurozone and is also considered the economic engine of the Eurozone. Secondly, the implication of the ongoing war that is taking place between Ukraine and Russia.

Nonetheless, today’s ECB meeting has a fairly resolved mainstream view that the Governing Council will call time on QE purchases at the end of this month, with a 25-bp rise in the deposit-facility rate from its current minus-50 bps to follow in July. Looking at the recent price action, there’s little prospect of a surprise today, and there’s almost no chance of an earlier move being priced in. This contradicts earlier guidance that QE will cease “shortly” before rates increase, but slavishly adhering to that expectation might be a lazy approach if the ECB intends to surprise hawkishly after May inflation surprised expectations yet again to the upside only last week.

An important point to pay attention to about the Eurozone is that it is challenging for the ECB to end the QE without creating a significant turmoil in the government bond yields. Remember, the crisis in the bond yield back in 2011 and 2012 led the bank to introduce the phrase “whatever it takes,” and we saw a massive QE by the bank as the Eurozone’s currency came under a major threat.

Today we can hear a similar promise from the ECB’s President about inflation, and the bank may take its time over the summer period to design a perfect tool to handle this issue. The ECB needs to assure the market that it has what it takes to control inflation without damaging growth in the Eurozone.