Two central banks deliver their monetary reports this week, with all eyes on the ECB and how it justifies the failure to deliver on its forward guidance
Last week was relatively slow for currency traders as the G10 currency pairs moved in a tight range. Depressed volatility made it possible for the US equity market to reach new all-time highs, but with little or no follow-through from the currency market.
The week ahead should be completely different for at least two reasons:
First, the cryptocurrency market had a terrible weekend as major coins dived more than 15% in panic selling. If the carnage continues today, the risk is that we may see some spillovers into the currency market.
Second, the European Central Bank (ECB) interest rate decision is due on Thursday. The EUR/USD exchange rate will likely move, and so will the entire market.
Main Events for the Week Ahead
The first two days of the week ahead should not bring anything new if we judge by the economic calendar. No important economic events are scheduled for Monday or Tuesday, but things become interesting from Wednesday.
The Bank of Canada will release its interest rate decision on Wednesday, just before the crude oil inventories. The central bank is expected to keep the overnight rate unchanged at 0.25%, but traders may want to scrutinize the details in the rate statement and the press conference that follows.
This week’s big event is Thursday’s ECB decision. Since the last meeting, the ECB has some explanations to offer, and euro traders will likely force its hand. The ECB vowed to ease financial conditions by significantly increasing asset purchases under its PEPP program. Only it didn’t.
The weekly reports since the previous meeting revealed that the ECB did not increase its bond-buying. As such, the EUR/USD exchange rate bounced from 1.17 and threatened to break 1.20 last week.
A credibility problem exists, therefore ECB President Christine Lagarde will likely be grilled with questions about the bank’s strategy; i.e., why it says one thing yet does another. EUR/USD volatility is expected to rise on Thursday, along with the entire FX market’s volatility.
The week ends with the Purchasing Managers’ Index (PMI) releases in the United Kingdom, the Euro area, and the United States. But again, the key driver for financial markets this week will come from the ECB on Thursday.