It seems to me that it’s worth starting with the following words of Christine Lagarde: “The Governing Council expects that the ECB’s key interest rates will remain at their current or lower levels until he sees that the inflation forecast will steadily approach a level close enough, but below 2.0% within its forecast horizon, and such convergence will be reflected in the core inflation dynamics “.
In general, this can diverge, and somehow it seems that these words were not spoken by Lagarde, but by Mario Draghi since there is simply no difference. The European Central Bank continues to pursue the same policy, which consists in a gradual and leisurely reduction in interest rates. This, in particular, is indicated by the words “or lower levels”. The wording about the “inflation forecast will be steadily approaching” has also remained unchanged since the days of Mario Draghi. Because nothing has changed still.
Anyway, what is this wording? What if the leadership of the European Central Bank at this very moment is occupied with more pressing problems and simply does not see this very approximation? And what about “fairly close, but below 2.0%”? Is the current inflation rate of 1.3% insufficient? Necessary, so that inflation rises to 1.8% or is 1.7% enough? Perhaps it is time to raise interest rates at 1.4%? As you can see, there are a lot of questions, but no answers to them. And this official wording, market participants have heard from the leadership of the European Central Bank for several years, when all the regulators just did is constantly cut interest rates. So it is not surprising that investors were disappointed and had expressed their attitude to what was happening with a further decline in the single European currency, which tirelessly lowered interest rates.
Refinancing Rate (Europe):
However, due to the sadness into which the unfortunate market participants plunged, they did not seem to hear Christine Lagarde saying that the board of the European Central Bank was starting to review its entire monetary policy. Yes, it starts. She does not plan to consider such an opportunity in the near future but rolling up her sleeves, she already did yesterday and began this revision itself. The thing, however, is not simple and rather slow, so they should keep only within by the end of this year. The current policy of the European Central Bank can only be reviewed in one way, which is towards a gradual increase in the three times damned interest rates. After all, rumors have been circulating about this for a long time.
It’s not just that Christine Lagarde introduced a complete radio silence on the eve of yesterday’s meeting of the European Central Bank, forbidding everyone to give at least some comments on the issue of monetary policy. Another thing is that there are no specifics, except for the terms regarding what exactly is meant by this very revision. Although it is easy to guess what is meant. But rumors and speculations are worthless in comparison with official statements and comments, so investors are forced to wait further. Another thing is that, at least now, it’s clear when everything should happen. And I will make a bold assumption that yesterday’s speech by Christine Lagarde will be the beginning of a gradual reversal, which has been dragging on for more than a decade of the slow weakening of the single European currency. Yes, for a while it will decline, but the speed of this process will noticeably decrease.
It is clear that against the backdrop of a meeting of the European Central Bank, the question of what happened yesterday with applications for unemployment benefits belongs to the category of the question of the cost of bananas in a neighboring bazaar. Nevertheless, it is worth taking a look at these data, as they will certainly have an impact on the general data on the labor market, which will be published in just two weeks. So, the number of initial applications for unemployment benefits is increased by 6 thousand rather than the expected 7 thousand, while the number of repeated applications for unemployment benefits fell to as much as 37 thousand instead of decreasing by 9 thousand. These scenarios would suggest that we should expect further improvement in the state of the labor market, which is already the best in the last fifty years.
Repeated Unemployment Insurance Claims (United States):
Today, preliminary data on business activity indices will be published not only in Europe but also in the UK and the United States. So, the forecasts for Europe are quite optimistic since the composite index of business activity should grow from 50.9 to 51.1. If we look in the context, then the index of business activity in the manufacturing sector can grow from 46.3 to 46.9. The service sector, on the other hand, is expecting a growth of 52.9 from 52.8. But this will not lead to the explosive growth of the single European currency, as everyone will wait for US data.
Composite Business Activity Index (Europe):
The pound will behave in the same way, although forecasts for business activity indices are even better than on the continent. The index of business activity in the manufacturing sector should increase from 47.5 to 48.4, while the service sector growth is projected from 50.0 to 50.7. Due to all this, the composite index of business activity can grow from 49.3 to 50.2, exceeding the psychological mark of 50.0 points and dividing the recession in the economy and its growth.
Composite Business Activity Index (UK):
But as already mentioned, everyone will wait for American data, forecasts for which are diametrically opposed. Thus, the production index of business activity should decline from 52.4 to 52.2. In the service sector, they forecast a decline from 52.8 to 52.7, so it is not surprising that a composite index is expected to decline from 52.7 to 52.5. Against the backdrop of rising indices in the Old World, their decline in the New World will clearly lead to a decrease in the dollar. However, the wait-and-see attitude of investors will also be connected with the fact that there are forecasts that indices may show insignificant growth, although there are few of which. These are particularly the production index from 52.4 to 52.5 and in the service sector from 52.8 to 52.9. Which left us with some uncertainty and intrigue. That is what the fate of the dollar will become.
Composite Business Activity Index (United States):
It all depends on preliminary data on business activity indices in the United States, and if they coincide with forecasts, then one should not be surprised at the growth of the single European currency to 1.1075. If they suddenly show an increase in the indices, then a reduction to 1.1025 is possible.
For the pound, the scenario is exactly the same as for the single European currency, and in the case of weak US data, the pound may properly rise to 1.3175. If optimistic forecasts are confirmed, then we should expect a gradual decline in the direction of 1.3075.