Central bank meetings in focus

By David Morrison  |  12/09/2018 15:12

Tomorrow sees monetary policy meetings from both the Bank of England and European Central Bank. No rate changes expected, but accompanying statements and the subsequent Draghi press conference could move markets
 
The summer is over and we’re well into the last month of the third quarter. Last week brought the latest update for US Non-Farm Payrolls. The headline jobs number was better-than-anticipated while Average Hourly Earnings also came in above forecast. The numbers helped to underpin the expectation that the Federal Reserve will raise rates twice more before the year-end, taking the top end of the fed funds target range to 2.50% from 2.00% currently. But we have another fortnight to wait until the Fed delivers its verdict on monetary policy. Before then we have rate decisions from the European Central Bank (ECB) and Bank of England (BoE) due tomorrow with the Bank of Japan (BOJ) and Swiss National Bank (SNB) next Wednesday and Thursday.

Looking at the BoE first. This isn’t a significant meeting for the Bank’s Monetary Policy Committee (MPC). The last important one was back in August as it also coincided with the BoE’s quarterly inflation report. Back then the MPC voted unanimously to raise rates by 25 basis points although the decision failed to halt the slide in sterling which was coming under pressure due to fears of a ‘hard Brexit’. The next big BoE meeting is in November and even then, it looks unlikely that the MPC will be in any hurry to tighten monetary policy further. Nevertheless, it will be important to keep an eye on tomorrow’s release of the Bank’s Monetary Policy Summary for any hints of a pick-up in hawkishness. It’s also worth noting that BoE Governor Carney is speaking in Dublin on Friday. Bear in mind that he has just had his tenure extended by six months beyond June 2020. Apparently, this is because he is best placed to help the country through any difficulties it may have because of Brexit. Bear in mind Mr Carney’s starring role in ‘Project Fear’ in the lead-up to, and since, the 2016 referendum.

The ECB is expected to keep its main refinancing rate unchanged at zero. In addition, the central bank’s Governing Council should reaffirm its commitment to end its Asset Purchase Programme in December. But ECB President Mario Draghi will hold his usual press conference later in the day. This has the potential to be market-moving as Draghi has form when it comes to putting a dovish tone to proceedings. Once again, we should expect him to insist that the bond purchase programme could be extended in both size and duration should there be any evidence that an inflation rate of around 2% is unsustainable. On top of this, investors are also primed for any questions he may be asked about the exposure of Spanish and Italian banks to Turkish debt. The Turkish lira has rallied a touch from the low it hit in early August. However, it remains weak having depreciated sharply along with other emerging markets.

Looking at the charts, there’s some resistance for the EURUSD around the 100-day moving average which comes in about 1.1640. Above there the next upside target is 1.1700. But a significant break below 1.1500 could see euro bulls heading for the exits and this could open the risk of a move back towards the summer lows below 1.1400. That would require a very dovish press conference from Mr Draghi, but nothing can be ruled out.

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