On Thursday, the European Central Bank (ECB) started its final meeting of the year. To them, it will be a celebration after having an excellent year.
This year, after years of lagging, the European economy is firing on all cylinders. It has outperformed the U.S. and the U.K. without high inflation.
The unemployment rate is at 7.6%, a level that was last seen before the financial crisis and more than 235 million people in the region are employed. Since 2013, the EU economy has added more than 10 million jobs. Retail and manufacturing jobs are surging, and consumer confidence is at a post-crisis high. The inflation of the region is currently at 1.5%.
This year, amidst all the issues with Brexit and the German election, the Euro has outperformed the dollar and the pound.
Today, the ECB will release its interest rate decision. Traders expect the members to leave the interest rates at 0%. Unless they do otherwise, this may not be market moving.
The news that may move the Euro today will be Draghi’s statement. In the last meeting in October, Draghi shocked monetary hawks after he extended the economic stimulus program until September 2018. During this extension, the monthly bond purchases will be reduced to about €30 billion. After the announcement, the Euro fell, and the European shares rose as the markets expected the easy money policy to continue.
Before the last meeting, many investors expected the ECB to end the program known as quantitative easing (QE).
Their decision in October meant that the ECB will continue spending €60 billion on corporate and government bonds until the end of the year. After that, they will half the amount until September. Draghi remained committed to extend the bond purchases or increase the amount of money spent depending on the economic conditions.
Today’s statement will therefore be very important and has consequential impacts to EUR pairs. Traders will watch out for Draghi’s comment on the bond purchases and his plans for the new year. Also, they will watch out for ECB’s thoughts on inflation and growth in the coming year. Traders expect the economic forecasts for the Euro area to be upgraded for 2018 and 2019 with a slightly lower growth rate expected in 2020.
Also, analysts expect the headline inflation forecasts to be upgraded with ECB’s target of 2% being hit by 2020.
In today’s statement, Draghi is likely to address the negative interest issue. In a speech at the Peterson Institute for International Economics, he reiterated his support for the negative rates arguing that they did not impact the banking sector negatively. During negative rates, banks pay the ECB an interest which some have argued would impact negatively on banks’ profits.
There is a strong possibility that the ECB will continue with its QE until September 2018 with higher chances of an extension to early 2019. Also, I believe that the ECB may maintain its 0% interest rates through 2019 when it may start raising rates gradually.