European majors weaken mildly against dollar today while European stock indices are nearly flat. Markets are waiting for tomorrow’s ECB and BoE meeting. Both are expected to keep policy rates unchanged and the major focus in ECB’s post meeting conference. While it’s generally expected that ECB would refrain from cutting rates this month, there are talks that it could eventually cut rates within this quarter. According to a poll by Reuters, more than a third believe ECB would cut rates to 0.50% by March. A major concern is that cut in main rate would either be accompanied by a cut in deposit rate, currently at zero, into negative territory, or narrow the spread. ECB President Draghi has expressed that both are unpreferred options already. However, as weak Eurozone economic data in Q4 suggests that recession could extend into Q1 even though it might not deepen. ECB could in the end be forced to do something to stimulate the economy despite opposition from core countries like Germany.
Yen weakens mildly today but stays in tight range so far. In Japan, the Council on Economic and Fiscal Policy met for the first time in four years today and discussed macroeconomic issues. BoJ Governor Shirakawa said after the meeting that he have “fully communicated with the government in the past but it’s very effective to exchange views at meetings” but he declined to comment on the discussions during the meeting. Chief Cabinet Secretary Yoshihide Suga said that the next BoJ government should see the need for bold monetary easing and have intention to weaken the Yen. It’s reported that BoJ would consider additional stimulus at its January 21-22 meeting, and might even double the inflation target from 1% to 2%. Yen has been deeply sold off since the new Prime Minister Shinzo Abe’s push for a 2% target. And, selling intensified as BoJ expressed it’s intent to review that price goal. Also, Abe has been pushing for “bold” monetary easing to revitalize the Japanese economy and theses have been priced in the markets. While the trend in yen in still bearish, it might take something really strong from BoJ to impressive the markets to accelerate the yen’s selloff, like opened ended asset purchases, or eliminating the 0.1% interest rate floor on deposits held at BoJ by commercial banks.
In US, Richmond Fed Lacker warned again yesterday that “attempts to overstimulate real economic activity via monetary policy can instead run the risk of raising inflation: and Fed’s monetary policy stance “needs adjustment”. He noted that there there are risks for Fed to fall behind the curve in 2014 and beyond. He warned that the use of 2.5% inflation forecast in Fed’s new threshold scheme risks seeing inflation pressures emerge while not “trip that inflation trigger”. And it would be that “inflation expectations and our forecast lag behind actual inflation pressures”. Lacker urged Fed to shift from buying mortgage backed securities to long-term Treasury securities “as soon as possible” Also he reiterated that MBS purchase is a form of fiscal action and credit allocation and thus “disadvantages other classes or borrowers”.
EasyForexNews Research Team