Today is central bank day in Europe, with both the Bank of England and , to decide on policy. We can pretty much discount the BoE in terms of surprises, with the Inflation Report later this month being the key focus in terms of how they adjust their forward guidance policy. For today, the ECB meeting is the main risk even for markets. There is a growing feeling that we are likely to see another easing of policy in the coming few months, with some looking for this to come as early as today. With rates already at 0.25%, the question is what next. The impact of cutting the benchmark rate further would be limited. The ECB may cut the deposit rate to below zero (so banks have to pay the ECB if they ‘park’ funds there overnight) or they may either introduce another asset purchase plan or revise the current one (approved non-sterilisation of bonds in the SMP). But even if no change in policy is seen today, there remains the risk that the press conference gives further details and hints of further changes ahead.
The single currency aside, the Aussie has once again performed well overnight, helped by better than expected trade data showing a surplus for the December period. AUDUSD is currently near the 0.90 level, which has not been seen for the past 3 weeks. Emerging market FX, so much in focus last week, has seen further stabilisation overnight. The main focus continues to be with tomorrow’s US jobs numbers, especially given the uncertainty on the extent of the rebound from the December weakness. The dollar has been more consolidative today, but stronger than expected data tomorrow would likely inspire new highs for the year on the dollar index (currently 0.4% below).
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