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Draghi preparing to show his muscles
A good number of macro news should be factored in as we move towards the ECB meeting today. The global road map is bumpy and macroeconomic developments increase the tension for all central bankers.

First, consumer inflation in China accelerated to 2.3%y/y in February from 1.8% as the contraction in producer prices slowed to -4.9%y/y from -5.3%. Shanghai’s Composite dropped 2.02% on speculation that the PBoC may lose some flexibility if consumer prices accelerate too fast towards the 3% inflation target.

Second, the Reserve Bank of New Zealand cut the OCR by 25 basis points to a new historical low of 2.25%. The kiwi tanked against all G10 currencies as a result of this surprise decision. Aussie recovered to a six month high against the kiwi and traded shortly above 75 cents against the US dollar. The EURAUD is now set to test 1.45 support, with the 21-day moving average diving below the 100 and 200-day moving averages (1.5237/46 area). The ECB’s verdict is the only obstacle.

ECB decision day.

The surprise RBNZ rate cut will certainly give a stomach ache to Mario Draghi, along with Brexit risks. Handelsblatt reported that the ECB questions banks on Brexit preparations. The euro is under pressure before the critical ECB meeting and Draghi’s press conference. The market expects at least a 10 basis point cut in deposit rates and a potential 10 billion euro expansion in monthly bond purchases. It is worth remembering that in December, a 10 basis point deposit rate cut and the 6-month expansion in the QE program had very surprisingly resulted in a 5 figure rally against the US dollar, even though the Fed raised the Federal funds rate by 25 basis points over the same month. The memories are fresh enough to pull us back from calling euro depreciation, which in normal circumstances would have been the reasonable expectation as a result of another negative rate cut. Today, it is all about Draghi’s capacity to convince the market that additional measures could foster the economic recovery and eventually generate inflation. We stand ready for two-sided volatility on the euro.

FTSE trades sideways before the ECB decision.

The FTSE trades sideways with utilities and telecommunication sectors leading gains in London. Industrials and materials underperform and the energy stocks are weaker on the back of cheaper WTI and Brent prices in Asia.

Financials are offered before the critical ECB decision. News that ECB has started investigating the potential impacts of a Brexit on European banks is certainly weighing on UK banks. We do not expect to hear any striking comments from Mario Draghi regarding such a politically sensitive subject. The focus will be on the ECB’s monetary policy.

The FTSE has been oscillating within the 6100-6200 range since the beginning of March. Enough dovishness from the ECB could be a lynchpin for a move above 6200p.
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