ECB & BoE In The Spotlight
The EUR struggled throughout the European session on Wednesday amid very little turnover as the US was on holiday. Nonetheless, with policy decisions looming in the UK and Eurozone on Thursday, activity is unlikely to be light. We expect the BoE to increase their asset purchase facility by £75bn (cons. £50bn) during their monthly MPC meeting. The need for greater stimulus to complement the BoE’s efforts to optimize credit allocation is seen as a more assertive strategy to bounce back from the current technical recession in the UK, though the BoE may also choose to highlight that with external conditions, especially those in the Eurozone remaining a strong headwind for the UK, it will take time for the results of the new measures to show. For the ECB, the decision is likely to be multi-fold. We do not expect any change in the benchmark refinancing rate or the deposit rate (cons. 25bp cut), but additional instruments and changes in openmarket operations’ guidance and further adjustments to collateral standards may be on the agenda. Draghi’s post-decision statement will be equally important as now with the politicians perceived to have shown some degree of flexibility and movement towards crisis resolution, the ECB may be expected to play their own part. Nonetheless, our economists note that the ECB would want to avoid setting policy on a quid pro quo basis with the political establishment. Growth data though, could be the new decider when it comes to conventional monetary policy. With activity clearly showing signs of contraction in both core and peripheral Europe, the case for outright stimulus is somewhat stronger and current market pricing has reflected such expectations. Wednesday’s meeting between Merkel and Monti yielded little of substance and the few comments which hit the wires were largely ignored by markets. EURUSD traded 1.2508-1.2606 and USDJPY 79.60-79.89. On Thursday, German factory orders and US non-manufacturing ISM figures are out.
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UBS Investment Bank