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Trader Focus on Likelihood of Negative Deposit Rates

David Becker
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In a week that will have a number of significant impetuses, the ECB meeting is by far the most significant. Draghi came the closest the ECB does to pre-committing to moving this week, with the new staff forecasts that will be delivered prior to the meeting. The central bank will have a range of options but will likely focus on interest rate adjustment, forward guidance, and perhaps a targeted funding-for-lending scheme.

A move to negative deposit rates is the most important of the measures that may be announced. It is unprecedented among key central banks. Even combating deflation for years, the Bank of Japan never charged banks for depositing money with the central bank.

In economic news Monday, the Final EU manufacturing PMI weaker than expected. The Eurozone May manufacturing PMI was revised down to 52.2 from 52.5 reported initially. This still signals expansion in the manufacturing sector, but the decline from 53.4 in April shows some slowdown in output growth.

On the inflation front, German May HICP seen below 1% after state numbers. NRW was the last of the states to release numbers and the headline rate in the most populous state dropped sharply to 1.1% y/y from 1.7% y/y. German state CPI data weaker than expected, with headline rates in the five states that had already released numbers, down 0.4-0.5 percentage points in May from April. The HICP rate is likely to fall below 1%, which will only fuel concerns about the risk of a prolonged period of very low inflation, even if there are no signs of a deflationary spiral.

Ahead of Thursday’s ECB meeting the Euro remains under pressure, with resistance seen near the 10-day moving average at 1.3635 which coincides with the 200-day moving average. With the 10-day moving average crossing below the 200-day moving average, a short term down trend is considered in place.

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