EUR/JPY recovery loses steam at 163.60 with all eyes on the ECB
- The Euro treads water above 16300 ahead of the ECB decision.
- Weak Eurozone GDP and inflation figures hint at further ECB cuts this year.
- BoJ Governour, Ueda, kept hopes of further tightening alive earlier this week.
The Euro keeps trading on a moderate positive bias on Thursday, fuelled by a positive surprise on Eurozone services PMI data, but remains trading within previous days’ ranges, with investors awaiting the ECB’s monetary policy decision.
The bank is widely expected to cut interest rates for the eighth consecutive time, bringing its benchmark rate to 2%, and President Lagarde will stick to her neutral “meeting by meeting” message, avoiding committing to any particular rate path.
ECB-BoJ monetary divergence might limit Euro rallies
After having slashed rates by 200 basis points in about one year, investors are pricing a pause in July. Longer-term, however, the soft Eurozone Economic growth and cooling inflation figures suggest that there is room for some more cuts later this year.
Eurozone Producer Prices Index has contracted at a faster-than-expected pace in May, -2.2% against expectations of a -1.8% monthly decline, following a 1.7% contraction in April. Darta, released on Tuesday, showed that consumer prices fell below the ECB’s 2% target rate.
In Japan, recent comments by BoJ Governour Ueda keep hopes of further monetary tightening alive, which is keeping Yen’s downside attempts limited.
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
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