All eyes are on the ECB monetary policy announcement in European trading hours. Inflation has firmed since the central bank introduced its QE effort in early 2015 – hitting the highest level in nearly three years at 0.6 percent last month – but remains well below policymakers’ target of near 2 percent. That has stoked expectations that it will be extended beyond its expiry in March.
The ECB has soaked up so much paper already that extending the QE effort will probably mean broadening the scope of assets eligible for purchase. Policymakers may also scrap the restriction on buying bonds with yields below -0.4 percent or do away with the so-called “capital key†that guides the share of purchases allocated to a given Eurozone country’s debt (as argued in our weekly Euro forecast).
On balance, this much may already be priced in. Another key variable at play is the updated set of inflation forecasts. The ECB aims to keep QE until it is confident that price growth is heading in the right direction, meaning it could start unwinding it well before hitting its target. This means that the Euro may rise if officials fall short on any measures already expected or meaningfully upgrade their inflation outlook.
The New Zealand Dollar outperformed in overnight trade after RBNZ Governor Graeme Wheeler appeared to bury rate cut speculation, saying current policy should see inflation reach the 2 percent target. He added that the low point for inflation has probably passed and predicted strong growth prospects for the island nation’s economy over the next 18 months.
Asia Session
