The DAX index has posted small gains in the Friday session. Currently, the DAX is trading at 12,454.20, up 0.22% on the day. It’s a quiet end to the week, with no German or eurozone releases. On Thursday, the ECB made no changes to interest rates or its quantitative easing (QE) program.
It’s been smooth sailing for the German economy in 2017, and the locomotive of Europe has led the way for a stronger eurozone economy, as growth has improved and unemployment has dropped. The German export sector has been boosted by stronger global demand, and domestic spending remains solid. Fears of an economic slowdown due to Britain’s departure from the EU and US President Trump’s protectionist stance have not materialized. The German Finance Ministry was positively upbeat on Thursday, saying that “the current picture of economic indicators suggests that the economic upswing continued vigorously in the second quarter”. GDP expanded at a strong clip of 0.6% in the first quarter, and Q2 is expected to post another gain of 0.6%. The economy received a thumbs-up from the IMF, which has raised its growth projections to 1.8% in 2017 and 1.6% in 2018. If the ECB tapers its asset purchase program in September, as many analysts expect, German economic growth could be even higher in the second half of the year. The fly in the ointment has been inflation, as both Germany and the eurozone continue to struggle with inflation levels well below the ECB’s inflation target of 2%. German policymakers have long argued that the German economy needs higher interest rates. However, the ECB has to look after eurozone members who are not doing as well as Germany, and has insisted that it will not withdraw stimulus until inflation in the eurozone moves closer to the bank’s inflation target.
The ECB didn’t make any moves at its policy meeting, but that didn’t stop the euro from posting strong gains on Thursday. EUR/USD has gained 1.6% this week, and earlier on Friday, the pair hit its highest level since August 2015. As expected, the ECB opted to hold steady with its monetary policy, keeping interest rates at 0.00% and the QE scheme at EUR 60 billion/month. The QE program is scheduled to end in December, and any change to that date could have a significant impact on the euro. At his press conference, ECB President Mario Draghi sounded upbeat about the eurozone economy, noting there were signs of “unquestionable improvement” in the eurozone economy. As for monetary policy, Draghi said the bank had not set an exact time for revisiting any changes to the current accommodative policy, but added that policymakers would review policy in September. These comments did not seem to break any new ground, but were perceived as hawkish by the markets and triggered a euro rally.
With Mario Draghi saying that the ECB will revisit its ultra-loose monetary policy in September (and the euro jumping higher as a result), what moves can we expect from the bank in September? As OANDA Senior Currency Analyst Craig Erlam explains, the markets should be prepared for some significant moves at the September policy meeting:
The most likely decision, despite the central bank still falling well short of its inflation target, will be to cut its purchases by another €20 billion as it did in April and extend by another six months. There has been a lot of speculation about a more explicit phasing out but I think the ECB want to be more careful given the fragile nature of the recovery. The result will likely be the same though with the central bank ending its quantitative easing program either at the end of 2018 or early 2019.
