The US dollar has been consolidating for the past couple of weeks, and that phase appears to be coming to an end. Next week’s economic data and events will likely underscore the divergent theme, which works in the dollar’s favor.
We do not expect the ECB to announce a sovereign bond purchase program at next week’s meeting, the last of the year. Recall that with Lithuania joins EMU on January 1, the ECB reduces its policy making meetings from once a month to once every six weeks, like the Federal Reserve. It also introduces a rotating voting scheme, which means that all member central banks, including the Bundesbank, will not vote at every meeting.
Many important ECB decisions have taken place over the objections of the Bundesbank, like the initial bond buying program SMP and OMT (which the Bundesbank has argued against before the European Court of Justice), and the recent covered bond and asset-backed securities purchase plans. Nevertheless, many observers still see the Bundesbank as having some sort of veto over ECB action, even though such veto power has not been tested. Others argue that the rotating voting is of little consequence in the ECB’s deliberative process. It is not as if, they say, the ECB will be able to take action just because the BBK did not have a vote at a particular meeting.
The biggest development has been a breakdown in oil prices. It will add to the divergent theme. Even though US oil output surpassed Saudi Arabia in recent weeks, American policy makers will view it as a net stimulative for the US economy. It is tantamount to a modest tax cut. In terms of the impact on inflation, the Federal Reserve puts more emphasis on the core rate.
In contrast, the drop in energy prices will be seen exacerbating the disinflationary/deflationary headwinds in the euro area. This, more than the small stimulus that BBK’s Weidmann acknowledged, will be the focus of the ECB. While the Bank of Japan places greater weight on the core measure of inflation, excluding the sales tax, its core measure includes energy.
