Markets are cautiously steady as focus turns to one of the key event rates of the week, the ECB's rate decision. It's been generally agreed that the Eurozone is facing deflation risk as January CPI flash moved further away from the central bank's 2% target to as low as 0.7% yoy. But the opinion on money markets conditions were divided as some seen recent volatility in EONIA as temporary. The ECB is facing the decision of whether to lower interest rates, launching another Long Term Refinancing Operation, or even outright QE. In particular, regarding interest rates, the ECB has the option of keeping the refinancing rate unchanged at 0.25%, or lower it by 15bps to 0.10%. In the meantime, the ECB could also keep the deposit rate unchanged at 0%. Or indeed, the ECB could do the unprecedented by cutting the deposit rate to -0.1%. That would give a strong signal to the market that the central bank is willing to explore into uncharted territories.
There is consensus that the ECB would need to do something. But, opinions are rather divided on when the ECB would act, and in what way. Some expected that the central bank would act in March. Regarding this, we'd like to point out that the ECB under Draghi seemed to have that decisiveness to act sooner that expected. The last rate cut was delivered back in November while everybody expected a December cut. So, the outcome of today's ECB meeting is rather wildcard. But, any announcement today, or lack thereof, would most likely trigger much volatility in the Euro.
Before the ECB, the BoE will also announce policy decisions today. It's generally expected that BoE would revamp its forward guidance as unemployment rate, at 7.1% in the quarter through November, is already so close to the 7% threshold. Nonetheless, the BoE governor Carney has made it clear that he will deliver the "evolution" of forward guidance with the quarterly inflation report to be published on February 12, next week. Carney will also have the chance to explain in details the changes during the press conference that day. So the BoE rate announcement today would possibly be a non-event.
Elsewhere, the Australian dollar extends this week's rebound after trade balance unexpectedly showed a surplus of AUD 468m in December, versus the expectation of an AUD -300m deficit. Exports is picking up pace and grew 15.1% yoy while imports rose 6.4% yoy. Novembers figure was also revised to a modest AUD 86m surplus. The NAB business confidence improved to 8 in Q4. Nonetheless, retail sales was a disappointment and rose 0.5% mom in December only.
Looking ahead, other than the BoE and ECB rate decision, Swiss SECO consumer confidence, trade balance, German factory orders will be released in European session. The US will release Challenger job cuts, trade balance, jobless claims and non-farm productivity. Canada will release trade balance and Ivey PMI.