Everything is about Inflation!
Thursday, September 9 ECB will have a meeting and eyes will turn to that meeting to see what policymakers are thinking about the current economic situation and their outlook and following that outlook, what they have to decide for future monetary policies.
When it comes to monetary policies, especially now, investors and market participants are looking at decisions about interest rates and asset purchasing amounts. Any decision for mentioned factors depends on two other factors, Economic growth, and Inflation.
Economic rebounding fine as we are checking the economic data. The latest PMI numbers, Industrial and Manufacturing productions, and Eurozone GDP all are above the expectations and growing well. The PMIs of business activity are robust, with the composite index at 59.0 in August, shy of its 15-year peak from July. On the other hand, vaccine rollout in the bloc seems to be fine. This positive view is reflected in recent increases in the European sovereign yields as well. 10-year yields among core Eurozone countries recently touched the highest levels since mid-July.
Austrian National Bank Governor Robert Holzmann following this great data, believes that the European central bank will be able to ease its bond purchases even earlier than market expectations. His comment is getting more considerable with the upward revision for Eurozone GDP in the second quarter earlier this week.
On the inflation front, CPI in this economic block rose to its more tha10-year high above 3% last month. Core CPI on the other hand was a bit lower than the ECB target at 1.6%. Even if it is increasing unevenly in the whole union, still it is turning on the alerts. CPI in Italy and France increased about 2%, and Germany experienced 3% inflation growth. For the third quarter, Eurozone CPI was 3.9%.
Considering published data, and mentioned market situation, it seems hawkish ideas have more buyers now. If the ECB members decide to stay put on policy and do not strike a hawkish note, Euro will be more under pressure and we can see the current downtrend at the very lower levels, especially now, with the rebound in the US dollar. On the flip side, any announcement of a PEPP reduction most likely will boost the common currency. Even not a decision, even a hawkish tone in the announcement or in the press conference after the meeting also could also be supportive.
The ECB’s policy decision will be announced at 11:45 GMT on Thursday, with the press conference 45 minutes after the announcement.
