"On balance, we believe the ECB will respond to the further disappointing inflation news with a policy rate cut on February 6"
- Mark Wall and Gilles Moec, Deutsche Bank chief economists
Four year have passed since the time Greece was on the brink of sovereign default that could possibly bring the single currency bloc to its knees. Today's major headache is represented by persistently low inflation. With falling CPI in January markets are already pricing in easing bias, as majority of investors are expecting the ECB to act at some point down the road. Though the ECB is not projected to stay pat on the policy, Mario Draghi and the company is known for unexpected surprises– keeping in mind November's rate cut.
Some analysts believe policymakers will cut the key refinancing rate by 0.15% to another record low, while they will also implement a negative deposit rate of –0.10%. While these are only the projections, there are dozens of reasons for Draghi to sound dovish this week. Therefore, the outlook for the single currency is bearish, even though it is sold only 50% of the time.
Persistently low inflation is not the only concern for the ECB. Growing rumours German Bundesbank will support stopping the ECB's weekly operations on the financial markets, are also weighing on the currency. That is draining the excess liquidity that is usually pumped into the financial system by the central bank. By using these operations the ECB kept interest rates low and was able to claim that no U.S.-style QE programme was ever initiated.
© Dukascopy Bank SA