In March 2017, Eurostat estimated European inflation at 1.50%. This is below the January 2017 figure of 1.8%, and the February figure of 2%. Falling inflation (year-on-year) does not necessarily bode well for the European Union, as it weakens the EUR, as is evident in the current exchange rate of the GBP/EUR, EUR/USD, and EUR/JPY. The ECB (European Central Bank) is managed by the Governing Council. This executive group is tasked with setting the marginal lending facility, deposit facility rates, and MROs (Main Refinancing Operations). The European Central Bank is one of the most important monetary authorities in the world, alongside the Bank of Japan, Bank of England, and the Federal Reserve Bank. As the chief monetary authority of the EU, the ECB is responsible for setting interest rates and controlling the money supply in the European Union. At the last meeting of the ECB’s Governing Council on March 9, 2017 it was decided that the interest rate would remain unchanged at 0%, the interest rate on marginal lending would remain at 0.25%, and the interest rate on the deposit facility would remain unchanged at -0.40%.
Trading the News: How to Profit off ECB Policy
David B., an analyst from 24Option stressed the importance of ECB policy on overall trading activity: ‘The European Central Bank is one of the most important monetary authorities in the world. If the Governing Council adopts a hawkish tone, we can expect the EUR to strengthen relative to its peers. By contrast, when ECB policy is accommodative we can expect a further weakening of the EUR, a strengthening of European exports and a weakening of European imports ceteris paribus.’ As it stands, ECB policy is squarely in favour of accommodative action. The ECB continued purchasing assets of €80 billion per month through March 2017, but in April that figure will be tapered to €60 billion per month. This indicates that we should be seeing a strengthening of the EUR on the global markets. For traders, the price/action correlation is clear: go long on the EUR, provided that the USD and the GBP offer little resistance to EUR appreciation. We can expect accommodative policy to continue throughout 2017 at a rate of €60 billion per month.
What Are the Latest Monetary Developments in the EU?
First of all, there has been a decline in the annual growth in credit in the EU with a figure of 4.3% (February 2017), compared with a growth in credit of 4.6% in January 2017. Other important metrics to look out for include the money supply (M3) growing at an annual rate of 4.7% (February 2017). Currency in circulation, including overnight deposits grew at an annual rate of 8.4% (February 2017) with no change from January. There was also reduction in the year-on-year increase in adjusted loans to nonbanking corporations. This fell to 2% in February, down from 2.3% a month earlier. As far as the yearly growth in aggregate money supply (M3, this is at 4.7% as at February 2017, made up largely of long-term financial loans (1.1%) net external assets (-2.1%) and government credit which comprises 3.6% of aggregate money supply in the EU.
Daniele Nouy Worries about Rising Interest Rates on EU Banks
One of the ranking European banking supervisors, Daniele Nouy (Single Supervisory Mechanism at the ECB) is concerned that rising interest rates could hurt European banks. In total, there are 19 countries in the euro zone, and Daniel Nouy is conducting risk analysis to prepare for any eventuality vis-à-vis ECB rate increases. While Nouy is not overly concerned about banks triggering another global crisis, she warns against complacency. She is concerned that the individual structures in European countries make it difficult to have an overarching structure that is applicable to all EUR banks. One of the key areas for Italian banks are NPLs – nonperforming loans – which severely undermine the banking systems throughout Europe. This erodes profitability and effectively puts pressure on the ECB to act. The ECB has alluded to the prospect of increasing interest rates and it has issued multiple public statements to that effect. This should strengthen the EUR in the future, but nobody’s expecting president Mario Draghi to act anytime soon.
