ECB Mixes It Up

It was a tale of two halves for the European Cetral Bank (ECB) meeting. Initially they delivered a comprehensive package of easing which included a cut to the main refinancing rate from 0.05% to 0% and a deposit rate cut to -0.4% from -0.3%. QE was also increased and expanded and they introduced a new year 4 year liquidity package in the form of TLTROs. At this point the market responded positively and the euro lost ground sharply against the USD and the pound. However, the rug was pulled by confirmation in the Q&A session from Mario Draghi that he does not expect to see any further rate cuts. This line in the sand on no further interest rates spun the euro from weakness to strength in a very sharp about turn and led to euro gains on the day amidst huge volatility.
 
It seems the ECB are trying to focus their attention on the credit space through bank lending to support the recovery and to curb disinflation. The decision is effectively moving away from targeting euro weakness as a way to turn the tide of falling inflation. The ECB has also now bought time before any additional easing would be considered. In summary they have sent the message out that they are done for now. This conclusion has been taken as a disappointment by the market which had expected the easing bias to continue with forward guidance and some are questioning if this is the ECB’s last stand and they are now out of bullets.
 

German inflation numbers come in weaker than expected

 
Today will be largely spent assessing yesterdays’ ECB decision and fallout. Elsewhere in the EU, this morning we have had German inflation numbers which have come in weaker than expected at -0.5%. Later on it’s the turn of UK trade balance which is expected to be slightly up from last month’s figure. Aside from this there is little data out, however over the weekend we have some key Chinese data to look forward to.