By Naeem Aslam Chief Market Analyst, ThinkMarkets UK Ltd
By Naeem Aslam Chief Market Analyst, ThinkMarkets UK Ltd

Why the ECB could Be Hawkish

The Eurozone has come a long way from its early days of crisis and its economy has strengthened in almost all countries. For instance, the economic momentum is accelerating at a pace not seen since November 2011. This is despite the fact we have seen enormous amount of political unrest and investors’ confidence wobbled several times over this period.

First Published: e-Forex Magazine 79 / Currency Clips / December, 2017

The Eurozone has come a long way from its early days of crisis and its economy has strengthened in almost all countries. For instance, the economic momentum is accelerating at a pace not seen since November 2011. This is despite the fact we have seen enormous amount of political unrest and investors’ confidence wobbled several times over this period. Thanks to the European Central Bank’s ultra-lose money policy, countries like Greece have also started to perform well. Greek economy has a real shot now to exit the bailout program given that we have seen three consecutive quarters of growth. The last time we have seen this sort of strength was in 2007. The country has struck another deal with its creditors in exchange of fresh loans. This has helped the Greek 10-year yield drop below 5 percent on the 12th of December. Again, a level which has not been seen in nearly eight years.

The outlook for the eurozone for the fourth quarter looks strong after a solid third quarter. The European economic sentiment indicator show a reading which is higher than the reading it had on the eve of the financial crisis. This suggests that the eurozone could sustain its rate of expansion during the Q4 at 0.6%. That would make eurozone’s annual growth for 2017 at 2.3%, the fastest growth since the financial crisis.

Eurozone has also made progress in its employment market since June 2013 and the unemployment curve is in downtrend. However, the area where it hasn’t made much progress is the wage growth. It is still feeble and lower unemployment rate has not been able to change it. This is even true in a country which is considered as the economic engine of the eurozone, Germany. The unemployment rate has touched its normal level, but the wage growth progress is underwhelming. 

So, going forward, the European central bank would use the tools of economic growth, wage growth and inflation to adjust its monetary policy. Stronger economic growth in the region does warrant them to speed up the process of normalising the interest rate and there is a higher probability that the ECB adopts more hawkish stance towards its monetary policy, but wage growth and inflation would keep them in check. 
As for the euro, the path of least resistance remains skewed to the upside but a higher euro would also hurt the economic growth in the eurozone. Thus, the ECB would use its forward guidance to make sure that the euro’s strength doesn’t get out of hand.