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    IronFX Daily Commentary | ECB’s Draghi: No limits to how far the ECB can use its tools | 22/01/2016

    22.01.2016, 11am

    • ECB’s Draghi: No limits to how far the ECB can use its tools ECB officials kept rates unchanged yesterday, but in the press conference following the meeting, ECB President Draghi stated that the Bank will possibly reconsider its policy stance at the next meeting in March, when we get the new ECB staff forecasts. Draghi also emphasized that the ECB has “no limits” to use its available tools to reach its targets. The likelihood for further easing in March triggered a sell-off in EUR with the pair falling briefly below 1.0800 against the dollar from 1.0900 before the press conference. Even though the measures in December were appropriate at the time, conditions have worsened since then, with oil prices down 40% since their last projections. Weaker growth and lower inflation outlook could force the ECB to review its policy stance in March. However, after expectations were raised too high in December, we would like to sound a note of caution as the Governing Council might under-deliver again.

    • Davos Word Economic Forum: Cameron in no hurry for EU deal At the World Economic Forum, British PM David Cameron stated that if the deal on his proposed package in February is not good, he is in no hurry to strike an agreement with EU leaders. He said that he can hold the referendum any time until 2017 and that it’s much more important to get this right, than to rush it. He also urged business leaders to join him in his campaign to keep Britain in the EU. Several business giants have already agreed to donate to the ‘Britain Stronger in Europe’ campaign and markets expect more to follow suit. The overall uncertainty surrounding the “Brexit” referendum is not benefiting anyone, and particularly the pound that has been under heavy selling pressure since the beginning of the year.

    • Elsewhere, the chairman of Saudi Arabia’s state-owned oil giant Aramco, said that the country can withstand low oil prices for a very long time. He also added that “obviously we don’t hope for that but we are prepared for it”. The chairman of the state oil company described the plunge in oil prices to below USD 30 pb as “irrational” and expects the market to recover this year. He also reiterated that Saudi Arabia would not cut production unilaterally or make way for rival producers. Even though US crude oil bounced on these comments and moved above USD 30, we would need to see a structural supply shift or global growth rising to trust further advances in oil prices.

    • As for today’s indicators, during the European trading day, we get the preliminary manufacturing and service-sector PMI data for January from several European countries and the Eurozone as a whole. All the indices are forecast to decline or remain unchanged, with the only exception being the French service-sector PMI, where expectations are for a slight increase. Even if we see any positive surprises in the PMI data, following Draghi’s dovish rhetoric on Thursday, they are unlikely to offset the selling pressure on EUR.

    • In the UK, retail sales for December are due to be released. Both the headline and core figures are expected to have fallen, a turnaround from the previous month. It seems that November’s sales surge due to Black Friday discounts, may have come at December’s expense. We would prefer to wait until the figures from the holiday season are out of the calculation before drawing any safe conclusions about the underlying trend in sales. Retail sales have been gyrating around zero in 2015, with the only exception in April and May when we had two consecutive positive readings. Given this pattern, a positive surprise in December seems rather unlikely. A potential fall in retail sales may add further downside pressure on GBP.

    • From Canada, the CPI data for December are forecast to show that both the headline and core rates have accelerated from the previous month and are now very close to the BoC target. At the latest policy meeting, Bank officials noted that inflation in Canada is evolving broadly as expected. Total CPI inflation remains near the bottom of the Bank’s target range as the disinflationary effects of economic slack and low consumer energy prices are only partially offset by the inflationary impact of the lower CAD on the prices of imported goods. As all of these factors dissipate, the Bank expects inflation will rise to about 2% by early 2017. If inflation overshoots the BoC target in the foreseeable future, we expect officials to reiterate that this is only temporary and caused by the weaker CAD. It might influence however inflation expectations and ease the pressure for further monetary easing. The country’s retail sales for November are also coming out.

    • From the US, we get the preliminary Markit manufacturing PMI for January. Although expectations are for a slight decline, the market reaction could be limited on this release as the market generally pays more attention to the ISM manufacturing index, which is to be released on the 1st of February. Existing home sales for December are expected to increase, a turnaround from November. Given that housing starts and building permits for the same month showed mixed results, an encouraging existing home sales figure is needed to support that the housing sector is on a solid foot.

    • We have four ECB speakers scheduled on Friday’s agenda: President Mario Draghi, Executive Board member Benoit Coeure, as well as Governing Council members Jens Weidmann and Ewald Nowotny speak.


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