Euro area finance ministers set the tone for central banks week

ForexNewsNow | Published on July 3, 2011 at 11:38 am

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Investors welcome another hectic week with the Greece dilemma still center stage. The jitters have eased over the prospects for default, yet the finance ministers meeting starts the week with eyes on the next move for Greece.

The finance ministers meeting will set the tone for the rest of the week, as investors hope concrete decisions will be made and Greece will receive the lifeline as soon as possible. Greece has met their requirements and indeed passed the austerity package and now has good argument to receive the fifth tranche of last year’s 110 billion euros aid package, a total of 12 billion euros.

With expectations that the meeting will go smoothly well and indeed see Greece on the path for more money, the focus will be also on comments regarding the second bailout package that is to be hammered the week after.

Easing fears will help the market sustain the gains and especially the euro with the focus this week turning to the central banks rate decision from the BoE and the ECB.

Eyes will be on the central banks with two opposing scenarios, where the BoE is feared to make a surprise call and loosen the monetary policy and the ECB is on the other hand expected to deliver the rate increase promised last meeting.

Starting with the Bank of England, expectations are rates will be kept at 0.5% and the asset purchases facility at 200 billion pounds. The bank is still cornered between rising inflation and slowing growth, with fears extending amid slowing global recovery that is agonizing exports as well, the main pillar for growth in the first quarter.

The economy expanded a sluggish 0.5% in the first quarter reversing the same contraction in the fourth quarter. Unemployment continued to worsen, spending dropping, and sectors expansion easing with inflation still stuck at 4.5%.

Last meeting the majority of the MPC were turning dovish on the economy with rising downside pressures, and with the end of arch hawk Sentance’s term the calls for tightening eased further, which is pressuring sterling with reduced bets on tightening and even moving towards APF expansion shall the recovery continue to worsen.

On the other end, the ECB is still the arch hawk of price stability among its peers, where despite rising debt problems and slowing growth, the ECB insists on anchoring inflation and second round effects.

Trichet last meeting in June signaled the rate hike for this month with the infamous phrase “strong vigilance” and even with the deepening dept crisis through June, in his last comments he assured the bank’s steps and mandate to ensure price stability and that the Governing Council remains “vigilant” which is a stronger signal for their readiness to move on rates this month.

The bank is expected to take rates higher to 1.5% from 1.25%, and also raise the lending and deposit facility by 25 bp each to 2.0% and 0.75% respectively.

Inflation remained at 2.7% in June according to the flash estimate opposed to the expected rise to 2.8% yet remains above the 2.0% target for the ECB. Inflation is not a problem for the ECB now as much as they fear the second round effect as higher inflation creeps into basic assets and wages which will intensify the pressure.

With easing Greek fears and the rate increase expected on Thursday, the euro might retain the upside momentum and continue to hold its grounds after the sharp decline seen in the past period.

More volatility is on the way with a hectic week and heavy data till the final rate decisions and also the nonfarm payrolls from the United States on Friday which also will be watched closely for signs over the extent of slowdown in the recovery.

Content provided by: ecPulse

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