Slowly but surely, the Forex market heads into one of the most important monetary policy decisions lately. To start with, tomorrow we’ll see the European Central Bank (ECB) taking the stage.
The stake is big. No one expects the ECB to hike or to be stringently hawkish, but it needs to take some steps.
Let’s build a bit the picture the Governing Council faces and what the challenges are.
Negative Rates in the Eurozone
Easing the monetary policy when inflation drops, is one thing. But what do you do when inflation keeps falling, and rates already reached the zero boundaries?
One answer comes from the Fed in the United States. It lowered the federal funds rates to almost zero.
When inflation failed to react, it embarked on a massive quantitative easing program (a.k.a. bond-buying program). So desperate the times were that the Fed needed no less than four rounds of quantitative easing before the economy showed signs of recovering.
The ECB followed suit. While a bit late (due to Trichet’s rate hike when the Fed eased), it followed the Fed’s path.
To compensate somehow for the wrong tightening, when the entire capitalistic world eased, the ECB went beyond a central bank dared to go: into the negative territory.
With that, I mean a major central bank. With the nineteen countries part of the Eurozone, the ECB sets the monetary policy over the second largest economy in the world.
When a central bank of this caliber decides to move rates in unprecedented territory, the world listens. Fortunately, the experience paid off.
Time to Shift the Language
With negative rates, the Eurozone economies picked up. Not only that we see growth, but we see broad growth across all countries.
Even Greece (yes, Greece!) printed a staggering 210 month high for the manufacturing PMI. Greece!
Remember Grexit? How about Brexit?
Once on everybody’s tongue, Grexit never happened. Instead, Brexit became a reality.
Against all the odds, the Eurozone GDP looks stable and with more growth potential. Inflation looks poised to pick up. Even the higher Euro is not much of a trouble with oil above the $60 mark.
Like it or not, the ECB is forced to change the language. It won’t announce a tapering of any kind this March, but it will recognize the strength of the Eurozone economy.
One thing is for sure: Draghi will outperform, and the market will overdeliver. Ready or not, ECB comes! Buckle your belts!
Also published on Medium.