The market's cautious mood comes after a wave of quarterly earnings reports, as traders ponder the ECB's next monetary policy moves due on Thursday.
ADVERTISEMENTEuropean markets opened in the red on Wednesday while the FTSE 100 was flat as investors await a key interest rate decision from the European Central Bank (ECB).
France’s CAC 40 was down 0.23% at 6,877.43, while Germany’s DAX declined 0.14% to 14,857.11.
Meanwhile, the FTSE 100 hovered up marginally, by 0.07%, at 7, 394.78 points.
The cautious market sentiment follows a raft of earnings reports this week - and as traders consider the next monetary policy path the ECB may take on Thursday afternoon.
“We expect the ECB to deliver a ‘dovish hold’ on Thursday, whereby it keeps rates unchanged and warns that mounting risks to the outlook warrants a greater degree of caution,” said Matthew Ryan, head of market strategy at financial services firm Ebury. “Since the last meeting, inflation in the bloc has eased, economic activity data has deteriorated and geopolitical risks are mounting.”
“This week’s PMI figures, in particular, were nothing short of a disaster, and all but eliminated the possibility of additional tightening,” he added.
Ryan also noted that with no change in policy expected for some time, ECB President Christine Lagarde is likely to strike a non-committal note on rates this week.
“We will, however, be paying particularly close attention to the view among policymakers on the growth outlook, which now appears key for the timing of rate cuts,” he said. “Should Lagarde voice heightened concerns over the possibility of a recession, while flagging geopolitical tensions and the sharp increase in government bond yields as risks to the economy, then the euro would likely sell-off.”
Meanwhile, Daniela Hathorn, senior market analyst at Capital.com, highlighted to Euronews Business that yields have risen across the Eurozone ahead of the rate decision, which has helped to tighten monetary conditions, strengthening the ECB’s position to hold rates.
“The recent tensions in the Middle East have also raised concerns about the already dampening growth prospects in the region. But, with oil prices having risen since the last meeting, and with the likelihood that they remain elevated until risks in the Middle East region dissipate, we may see upward pressures on inflation going forward, which could make the ECB’s life much harder,” she said.
Hathorn further noted that prior to the pandemic, most central banks would have deemed a rise in oil prices as somewhat deflationary as it reduced purchasing power and competitiveness.
“But in the current inflationary environment, where bringing inflation back to target has been a real concern for policymakers, we may see the ECB opting for a higher risk of recession over their credibility about controlling inflation being undermined. This could mean further rate hikes, albeit unlikely at the meeting this week,” she added.
The market analyst said there is likely to be continued hawkish commentary from Lagarde at the press conference following the interest rate announcement, even if there’s no hike this time around.
