Financial market research and analysis

The European Central Bank (ECB) meeting is the major macro event of the day.

The ECB is expected to maintain the status quo at today’s meeting, yet ECB President Mario Draghi’s press conference at 12:30 GMT will be in focus given that investors need to know whether or not the ECB is planning to extend its monthly 80 billion euros worth asset purchases programme beyond March 2017. If the answer is positive, the next question is, how will the ECB grant the viability of the programme given the scarcity in eligibility bonds.

German policymakers will certainly be among the leading opponents to an extension of the Quantitative Easing (QE) beyond the first quarter of 2017. The Bundesbank is obviously the most hit by the rush in the Eurozone bonds. The bank is due to buy approximately 344 billion euros worth of German government bonds, or regional debt, yet only 70% of this amount is currently available on the market. Even a couple of non-state owned companies’ bonds yielded in the negative territories after the ECB announced the decision to shift towards corporate bond purchases earlier this year, on the back of a drying EZ sovereign pool. The abnormally distorted risk-to-return ratio across the Eurozone markets is a growing concern, and has perhaps  been the major reason preventing the ECB from announcing new measures at last month’s meeting.

Now, the question is, will the ECB change the rules of the game, or will Mr. Draghi hint at a potential tapering in the Quantitative Easing (QE) programme and introduce a new set of tools in order to bolster growth and inflation in the Euro area?

The EURUSD extended losses to 1.0955 on the back of dovish ECB expectations, yet the risks are two-sided. Should Mario Draghi refrain from delivering a perspective on the future of the QE programme, or should the ECB’s announcement fail to satisfy the euro-bears’ appetite, we could see a short-squeeze in the euro, accompanied by a sell-off in Eurozone stocks and a further improvement in Eurozone’s sovereign yields.

If however, Mario Draghi shows up with a sustainable plan to maintain the loose monetary conditions in the Eurozone, while convincing investors that new measures could help investors to realise their projects to increase the employment, to enhance wages, hence to generate inflation, the EURUSD could extend weakness to the 1.0850/1.0800 area.

Turkey to cut the lending rate?

The Central Bank of Turkey (CBT) will also give its policy verdict. Analysts expect an additional 25 basis point cut to the overnight lending rate, yet this week’s aggressive depreciation in the lira brought Yigit Bulut, President Erdogan’s chief adviser, to take a step back yesterday. Bulut said that the CBT could ‘pass this month’ and maintain rates unchanged to prevent a new wave of sell-off in the lira.

Investors are sceptical regarding the CBT’s unorthodox policy. Even if the sequential cuts in the lending corridor was put on the account of a policy simplification, the lower rates in the lira are no longer seen as appropriate, especially given the risks of overheating inflation. Depreciation in the lira and the recovery in oil prices are threatening the inflation in Turkey, while food prices are under close watch. Of course, Turkey’s plans to tweak the consumer basket, by reducing the percentage of food in the basket, could temporarily trick the algos, yet in the mid, long-run, the CBT needs to rethink its unorthodox strategy, especially if the Federal Reserve (Fed) decides to make another move to raise the US rates.