Financial markets are on edge ahead of Thursday’s anticipated European Central Bank (ECB) meeting, which investors hope can provide clarity on how the central bank plans to revive economic growth in a period of political risk.
The Eurozone continues to be engaged in a losing battle with static growth while anaemic inflation levels that are well below the 2% target have challenged the ECB’s credibility. With most central banks following a tradition of caution, it should be no surprise if the ECB adopts an inactive stance in Thursday’s policy meeting. Although it is widely expected that rates remain unchanged, there are speculations over if the bank will announce an extension of its 80 billion monthly purchases.
What will be interesting will be how Mario Draghi discusses how the Eurozone plans to weather the lingering impacts of Brexit while attempting to convince participants that the ECB still has some ammunition to revive growth. It seems likely that today’s policy meeting follows a dovish path consequently leaving doors open for further easing in the future. Although key policy settings may remain unchanged today, Draghi may repeat his dovish mantra which could entice sellers to send the Euro lower.
Sterling searches for direction
Sterling was open to sharp losses on Wednesday after Bank of England Governor Mark Carney said he was “comfortable” that the Bank of England acted correctly in cutting UK interest rates after Brexit. Carney was “absolutely serene” about how he warned of the implications of Brexit to the UK economy before the referendum vote and even stated that the BoE decision to act quelled the impacts of Brexit. Although recent domestic data has suggested that the UK economy displayed resilience post-Brexit, it still remains too early to gauge the ramifications of Brexit with concerns still elevated over the UK’s future relationships with its biggest trading partner.
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With the BoE Inflation report hearing ending on neutral footing investors may turn back to UK data to determine if the Bank of England unleashes further stimulus measure in the future. With recent domestic data mixed, some Brexit concerns were rekindled consequently leaving Sterling open to losses. If UK data continues to disappoint, then speculations of the BoE unleashing further stimulus measures could mount which may entice Sterling bears to attack.
Commodity spotlight – Gold
Gold displayed an incredible rebound this week with prices charging towards fresh three-week highs at $1352.46 following the string of soft US economic data which dented expectations over the Federal Reserve raising US interest rates in September. This yellow metal remains extremely sensitive to US rate hike speculations and may be poised for further gains as optimism wanes over the Fed taking action anytime soon. With Dollar weakness potentially becoming a key theme, Gold bulls may have been provided a solid foundation to install repeated rounds of buying. If US domestic data continues to disappoint, then the yellow metal could be gifted an opportunity to venture towards $1375.
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Otunuga is a research analyst at FXTM
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