Forex: Euro Eyes ECB Growth, Inflation Forecasts to Set Policy Outlook

Talking Points:

Euro Looks to ECB Growth, Inflation Forecasts to Guide Policy Outlook
BOE Policy Announcement Probably a Non-Event for the British Pound
Japanese Yen Gains as Stocks Decline in Asia, Boosting Haven Demand

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A monetary policy announcement from the European Central Bank is in focus. Policymakers are expected to hold rates unchanged at 0.25 percent and maintain the existing guidance framework, saying rates will remain at current levels or lower for an extended period. Traders’ attention is likely to be on an updated set of 2014 and 2015 growth and inflation estimates. These will help to gauge the extent to which the ECB is concerned about deflation and thereby guide speculation about additional stimulus efforts on the horizon.

Economists’ baseline scenario puts Eurozone inflation at 1.3 percent in 2014 and 1.5 percent in 2015 according to a survey of forecasters polled by Bloomberg. ECB projections that fall below these levels would broadly represent a dovish development and may weigh on the Euro (and vice versa). For their part, the markets don’t seem to think last month’s surprise ECB rate cut was sufficient to secure price stability. A look at breakeven rates – a measure of inflation expectations backed out of bond yields – reveals traders continued to slash bets on price growth across the maturity spectrum since November’s policy meeting.

The Bank of England is likewise due to deliver its monthly monetary policy announcement. Mark Carney and company are expected to keep the existing policy mix unchanged. The BOE Governor and his colleagues spent much of last week arguing forcefully that the great victory of the forward-guidance policy framework adopted in August has been to disconnect economic data outcomes from policy speculation. On balance, that means the BOE is firmly locked in place for the time being despite recently upbeat news-flow, suggesting today’s announcement will probably amount to a non-event for the British Pound.

The Japanese Yen outperformed in overnight trade as Asian stocks declined, driving demand for the safe-haven currency. The MSCI Asia Pacific regional benchmark equity index fell 0.4 percent while Japan’s Nikkei 225 fell 1.5 percent. Newswires attributed the move to risk aversion amid fears of a relatively sooner move to “taper” Fed QE asset purchases after the ADP Employment report showed the US added 215,000 private-sector jobs in November. That topped expectations for a 170,000 increase and marked the largest gain in 11 months.

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Asia Session:

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CCY

EVENT

ACT

EXP

0:30

AUD

Trade Balance (A$) (OCT)

-529M

-350M

-271M

Euro Session:

GMT

CCY

EVENT

EXP/ACT

IMPACT