ECB meeting the focus this week

Last week was dominated by the markets’ reassessment of the outlook for interest rates – with the timing of a first cut in central bank policy rates pushed out a bit and the scale of expected easing pared back a bit – but it had a muted enough impact on the main currency pairs, with the dollar ending marginally higher overall. It is trading at around $1.09 and $1.27 to the euro and sterling respectively this morning, leaving EURGBP hovering just below £0.86.

The repricing of the interest rate outlook had a notable impact on bond markets, not surprisingly, with US, German and UK 2-year yields rising by around 25bps last week and 10-year yields increasing about 15-20bps. Equity markets were on the back foot for a while too, but the S&P 500 rallied on Friday to close at a new record high.

Fed member Daly says she needs to see more evidence that inflation is heading back down to 2% “consistently and sustainably for me to feel confident enough to start adjusting the policy rate,”  though she acknowledges that “it’s appropriate for us to look forward and ask when would policy adjustments be necessary so we don’t put a stranglehold on the economy.” The market has pared back the chances of a rate cut in March but sees a quarter-point reduction at the April 30th – May 1st meeting.

The ECB’s  monetary policy meeting on Thursday will be the main focus for markets this week. When  the ECB met back in December it said it was “premature” to talk about rate cuts; however if the intervening few weeks is anything to go by, then discussion about rate cuts will dominate this week’s post-meeting press conference. The market is pricing in about a 70% chance of a 25bps reduction in April, which is probably too early as far as the ECB is concerned.

There are some important economic data due this week as well, including flash PMIs for January in the main economies on Wednesday and a first estimate of fourth quarter GDP in the US on Thursday (the consensus expects growth to have stepped down from its rapid pace in Q3). with PCE inflation for December scheduled in the US as well on Friday.