Research Note: March BOE and ECB Meetings

On Thursday, Mar. 8 at 0700ET/1200GMT the Bank of England is set to announce its policy decision, followed at 0745ET/1245GMT by the European Central Bank's interest rate decision and the 0830ET/1330GMT ECB press briefing. Below is our outlook for those events.

BOE Outlook: The BOE's MPC is unanimously expected to hold interest rates steady at 0.5%, according to Bloomberg surveys of analysts and our own view. The MPC is also expected to maintain its asset purchase target at £325B after an increase of £50B at the February meeting. Recent data improvement and commentary from Bank of England members indicate that they are likely to stay the course with the current plan to buy £50B of gilts from February to May. Manufacturing and industrial production readings of late have exceeded expectations and are now showing monthly growth from prior declines and both manufacturing and service PMI’s continue to indicate expansion. Furthermore, retail sales have accelerated and inflation remains well above the bank’s 2% target with yearly CPI growth last at 3.6%. Though Posen and Miles dissented on the dovish side with calls for more stimulus at the last meeting, they are in the minority. MPC member Weale said that he did not think there was a case for more QE once the current round is complete and Deputy Governor Tucker said that the bank must be ready to ‘gradually’ withdraw stimulus.

ECB Outlook: The ECB is widely expected to hold rates steady at 1.00%, according to Bloomberg surveys, and we agree. In his press briefing, we look for ECB Pres. Draghi to indicate the need for time to assess the banks recent operations. As a result of extraordinary liquidity measures (two 3-year LTRO’s) the ECB balance sheet has expanded to a record 3.02 trillion euros ($3.96 trillion) which is about 32% of Euro zone GDP. To put this in perspective, the Fed’s balance sheet currently stands at $2.9 trillion and is about 19% of U.S. GDP. Draghi may highlight further Eurozone financial sector stabilization and the positive influence from the long-term refinancing operations. As indicated by the weekly reports of ECB purchases, the bank has not purchased any government bonds in that past several weeks and it appears that the Securities Markets Programme (SMP) may be on hold for the time being. We expect Draghi to take a neutral stance on policy and the lack of any fresh measures and expanded balance sheet may ultimately weigh on the EUR.

Market Strategy: With no change expected by the Bank of England and therefore no statement expected to follow, the announcement is likely to be a nonevent. As such, we focus our strategy on the EUR. EUR/USD has recently broke below key support which can be seen by a rising trendline that connects the Jan. 16 and Feb. 16 lows as well as the 38.2% Fibonacci retracement level of the rally from January lows to February highs which is around the 1.3150/60 zone. The break and subsequent decline has been relatively minimal thus far as the EUR/USD drop was halted by the top of the daily ichimoku cloud which is currently just below the 1.31 figure. There is the potential for upbeat comments from ECB President Draghi that may give a temporary boost to the euro, however our bias is to the downside. As such, we would look for rallies in the euro as selling opportunities while EUR/USD remains below the 100-day simple moving average, daily Tenkan line, and 50% retracement of the recent decline. These levels converge around the 1.3270/90 zone and a break above would negate our view while a drop into the daily cloud is likely to see acceleration to the downside bringing the 1.30 big figure into focus. It is also important to note that price action in the euro remains vulnerable to headlines regarding the Greek debt swap. The deadline for PSI participation is tomorrow at 2000GMT, however the results will not be known until Friday.