European Central Bank meeting takes centre stage as markets want clarity on monetary policy
Last week’s remarks from the ECB (European Central Bank) President Christine Lagarde hinted that she strongly feels the need for additional monetary tightening has disappeared, and that the next move in conventional policy will be a cut in interest rates. However, the markets are still indicating that rates will be cut in the spring, but Lagarde’s comments indicated a preference to wait until the summer.
This week’s ECB meeting will deliver no change to monetary policy, in my opinion, but the press conference will be interesting in terms of how much the media presses the President on interest rate cuts. We should not forget that the ECB will also have to start to reduce its QE (quantitative easing) asset stockpile at some stage, but that might be easier under monetary loosening conditions, in my view. In a week where there are relatively few important releases or events due, the ECB could cause some significant moves in FX markets, and I think EUR underperformance is the risk.
Meanwhile in the UK and US, the data and surveys are limited
There will be interest in the Q4 GDP (Gross Domestic Product) release from the US due on Thursday. Will the US economy have lost as much momentum as predicted by Bloomberg’s consensus estimates, or will it outperform, much like the recent activity figures such as retail sales and industrial production?
As for the UK, there will be limited interest in the December public finances data, and more attention on preliminary January PMIs (Purchasing Manager’s Indices) for manufacturing and services, as well as the January GfK (Growth from Knowledge) consumer confidence survey. The pound is holding up better against the USD than the EUR is, and given this week’s risks from the ECB meeting, we could see that trend continue, in my opinion. GBPUSD has yet to make a fresh weekly close higher, but this week might have the right combination for temporary GBP strength, in my view.
FX markets have seen a renewed weakening in the likes of the CNY and JPY versus the USD in the past week or so. Concerns over the performance of the Chinese economy continue to grow, and the Japanese economy doesn’t look in much better shape either. Both economies are also facing an uphill struggle on GDP, with the labour force in each contracting recently. The risk for the CNY and JPY against the USD is for additional weakness, in my view, unless there is some sort of market event that undermines USD sentiment. We haven’t seen any evidence of such an event emerging yet.
Central bank meetings see the Bank of Canada and Norges Bank meetings in focus this week
The Bank of Canada has had a tightening bias in situ for the last 3 meetings, but the economy has weakened over that period. Could the Bank of Canada choose a more balanced approach for interest rates, signalling that the risks have become more even? I think it could, which could create a short-term CAD sell-off around the meeting.
As for the Norges Bank, the risks remain for more tightening. The Norwegian economy isn’t in the greatest shape, but neither is the NOK, which has lost 9% of its value against the EUR since the beginning of 2023. That indicates heightened imported inflation risks, something that the Norwegian central bank will want to guard against. This is not a main meeting, but I suspect the Norges Bank will hold onto its tightening bias.
