While the start of the week is looking relatively quiet for the markets, this is in no way a reflection of how the week as a whole is shaping up with central banks dominating proceedings.
The European Central Bank showed on Thursday just how difficult a job the central banks now have in convincing the markets that their policy responses to the low inflation environment are sufficient. The ECB unveiled a package of measures that appeared to attack the issue from every angle and while the markets initially giving it the thumbs up, it only took ECB President Mario Draghi suggesting that no more rate cuts are being considered to undo everything. The response was particularly drastic in FX markets, where the euro went from dropping around two cents against the dollar to trading two higher.
Central bankers will need to be extremely careful when delivering their own policy messages this week, so as to avoid also falling victim to the markets unforgiving nature at the moment. The Bank of Japan has already been on the receiving end of this having unexpectedly joined the negative interest rates club at the last meeting, only to see the yen resume its ascent a day later. A similar move is not expected this week but it will be interesting to see what kind of message it puts across overnight tonight.
We’ll also get decisions from the Reserve Bank of Australia tonight, the Swiss National Bank and the Bank of England on Thursday, and of course, the Federal Reserve on Wednesday. This should make for an interesting week for the markets and provide a real test of central banks’ ability to successfully manage market expectations.
Monday is looking rather quiet but gives markets another opportunity to properly absorb last week’s ECB announcement before other central banks steal the spotlight. Europe is expected to open a little higher, building on Friday’s gains and taking a lead from the positive session in Asia overnight. Disappointing numbers from China over the weekend did nothing to put off investors at the start of the week despite industrial production and retail sales both falling well short of expectations in January. Perhaps the prospect of more stimulus is enough to support markets at a time when the economy is slowing and facing a tough challenge of hitting this year’s growth target.
Source: Market Pulse
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