EUR/NZD To Get Hit The Hardest During ECB Monetary Meeting This Week

The divergence in monetary policy between ECB and RBNZ will widen as ECB is expected to set the stage for a September rate cut and resumption of QE. EUR/NZD could dive further.

Odds of a rate cut by ECB rose above the 50% threshold for the first time

Market is expecting ECB to cut their rates from -0.4%, which is already a record low, to -0.5% in September. ECB, similar to their central bank peers, are under pressure to ease monetary policy to keep inflation expectations from collapsing amid slowing global growth, increased trade protectionism and weak economic data. 

For ECB, low inflation and slower eurozone growth are the main problems on hand. The bond markets have staged a powerful rally after ECB announced further easing measures to counter the pressing issues. 

However, market could be disappointed as Draghi may not be as dovish as what the market perceives. This is due to eurozone growth and inflation data not being as low as what is expected. Data has improved since the previous ECB meeting and if the trends continue, ECB may not have to be as forceful in their easing and stimulus approach.

Consumer-price growth, also known as inflation, averaged at 1.2%, below ECB’s target of “below but close to 2%” goal. This is definitely far from the target of 2% but most of its peers are either under-performing or have lowered inflation forecast just to meet the target. 

On the other hand, eurozone composite PMIs which are seen as a strong indicator of GDP growth, have improved though it’s hard to forecast whether the trend could continue. Manufacturing PMI was the only one stuck in negative territory due to increased trade and Brexit uncertainty and there will be concerns whether the weakness will spill over to a broader economy. 

Investors should not only wait for confirmation of rate cuts by Draghi but also ECB plans on reintroducing qualitative easing (QE). The current negative interest rates are already hurting the banks, thus a further 10bps cut may require mitigation measures such as exemptions for some deposits. Besides, a 10bps cut may not be enough to get inflation back on track given that interest rates are already in negative territory. 

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