Forex Marketz Daily Forex News – Fully Markets Update
Two weeks ago, the European Central Bank’s (ECB) President Mario Draghi said the bank would ease more and the bank “stand’s ready to adjust” its policy further. Many economists took this as an indication that the ECB would be starting a quantitative easing (QE) program, similar to what the United States and Great Britain had employed over the last several years to jumpstart Europe’s stagnating economy. Last week, they slashed rates to near zero. This caught the financial markets off guard.
The ECB reduced its main lending rate to 0.05 percent. They also cut their marginal lending rate and deposit by 10 basis points each. These rates are key. Why? They are the corridor in which the overnight interbank rates fluctuate. When they reduced these three policy rates, they but even more downward pressure on interbank rates. This number has been plunging over the last few days. Another side effect of this move, is depreciation of the euro currency. The euro is now at its lowest level versus the dollar in well over a year.
The ECB is also beginning to purchase asset backed securities. They hope to bring the costs of long term borrowing costs lower for nonfinancial businesses. Credit growth in this sector has been practically nonexistent and any form of growth would be good news.
The central bank reacted to weak economic growth and nearly zero inflation. Real GDP was flat in the second quarter with contractions in Germany and Italy. Real GDP in Q2 rose a mere 0.7 percent on an annual basis. Manufacturing PMI has been in a spiraling downward since early in 2014. The service sector PMI, after moving higher, moved lower in August. The only good piece of data came out of Germany. German factory orders jumped higher by 4.6 percent in July. This had been flat most of the year, which could indicate this move higher could be less than we think.
The ECB governing council feels the general health of the economy is weak. This means, they could ease policy even more in the coming months. They seem to be unanimous with this sentiment. Draghi said in his statement following the release that “”the Governing Council is unanimous in its commitment to using additional unconventional instruments within its mandate.” What does this mean, we could have a QE program which will focus on asset buying similar the programs used by the U.S. and U.K. Long term yields have been falling off in the EU in expectation of this move. We expect economic growth to remain anemic in the common currency bloc and because of this we expect their QE program to start before then of this year.
