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Germany Piles Pressure on ECB to Tighten Monetary Policy

Germany Piles Pressure on ECB to Tighten Monetary Policy

Martin Essex, MSTA, Analyst

Talking Points

- In what looks to be a coordinated move, senior German figures are pressing the ECB to tighten Euro-Zone monetary policy.

- However, the ECB will likely ignore them and keep its powder dry for several more months, to the detriment of the Euro.

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First there was the Bundesbank President, then the Deutsche Bank CEO, then the German Finance Minister – all saying that the European Central Bank should tighten Euro-Zone monetary policy. Yet the ECB will almost certainly ignore them tomorrow, leave all its monetary settings where they are and not even hint at “quantitative tightening” until later in the year.

At the end of last month, Bundesbank President Jens Weidmann, a consistent hawk who is also a member of the ECB’s rate-setting Governing Council, told a German newspaper that he does not see any need for an extension of the ECB’s asset-purchase program beyond the current end date of December 2017 given the current inflation outlook.

Today, Wednesday, it was the turn of Deutsche Bank Chief Executive John Cryan, who told bankers in Frankfurt that “the era of cheap money in Europe should come to an end despite the strong Euro” and that there are increasing signs of bubbles in the capital markets.

Just minutes later it was the turn of German Finance Minister Wolfgang Schaeuble, who said he respects the independence of the ECB but that everyone around the world wants a normalization of monetary policy as soon as possible.

In one sense their timing was poor as data released earlier showed that German factory orders fell 0.7% month/month in July when the consensus among economists was that there would be a small rise. Year/year there was an increase of 5.0%, below both the previous 5.1% and the expected 5.8%.

However, the ECB Governing Council would likely have ignored them anyway given the strength of the Euro, geopolitical tensions and global risks, including North Korea and Hurricane Irma. Instead, the ECB will likely keep its interest rates and its €60 billion per month asset-purchase program unchanged and not even begin to talk publicly about tapering monetary stimulus until after its October 26 or even its December 14 meetings.

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That means any monetary tightening could start well into the new year, and that could put downward pressure on the Euro, even though it is currently benefiting from the weakness of the US Dollar.

Chart: EUR/USD Daily Timeframe (June 7 – September 6, 2017)

Germany Piles Pressure on ECB to Tighten Monetary Policy

Chart by IG

Technically, the EURUSD chart above is still looking positive but EURJPY and EURGBP are both looking weaker and that could well be where any Euro losses are seen.

--- Written by Martin Essex, Analyst and Editor

To contact Martin, email him at martin.essex@ig.com

Follow Martin on Twitter @MartinSEssex

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