ECB and RBA meetings to steal the show this week – Rabobank

Jane Foley, Senior FX Strategist at Rabobank, explains that on the same day that the UK goes to the polls, the ECB is set to steal a good portion of the limelight with its June 8 policy meeting. 

Key Quotes

“It comes at a time when better Eurozone economic data have led some ECB watchers to expect the governing council to change its forward guidance and remove language that suggests rates could be cut again and that the size of its bond-buying program could be increased.  In our view the ECB is set to change its risk assessment for economic growth to "broadly balanced", but will probably refrain from changing the forward guidance language and the inflation risk assessment.  Bringing the latter to "broadly balanced" would be a strong signal to start tapering QE early next year.”

“We think the market is still too optimistic with regard to its expectations regarding the first ECB depo rate hike (now projected by the market at around mid-2018).  The inflation sustainability question may not be answered convincingly before mid-2018 and the expected market turbulence following the winding down of QE would both suggest that the ECB will be slower in raising rates.”

“The RBA also has a policy meeting scheduled this week.   Steady rates are expected by the market but, relative to the start of the year, the market has become less convinced that the RBA’s rate cutting cycle is over.  The AUD was knocked at the end of last week by softer than expected Australian CAPEX numbers and by disappointing Chinese Caixin manufacturing PMI data.  This morning the AUD has recovered some ground following the better China Caixin services survey which showed the fastest pace of expansion in four months, but Chinese growth concerns are likely to remain.  The minutes of the RBA’s May policy meeting contained the warnings that “the outlook for the Chinese economy, particularly the residential property market, was an ongoing source of uncertainty for Australian exports and the terms of trade.  Another source of uncertainty was how the Chinese authorities might balance achieving their growth targets with the risks associated with high and rising leverage in the Chinese economy”.”