2013-04-26 03:44 GMT

All eyes on the ECB

This week's data releases were disappointing on balance. While economic numbers in the US and China continued to come in on a weak(er) note, the eurozone's business climate readings failed to improve again. The UK's GDP report, however, was a nice exception, showing that the economy returned to growth earlier this year. With German business sentiment figures down again (but overall still signaling growth), the French numbers pretty mixed at low levels and Italy's reading (to be released next Thursday) likely up from depressed lows, EMU-wide sentiment does not show signs of recovery after the weakness of the last two months. This should further challenge the ECB's expectations of a stabilization in activity in 1H13 followed by a gradual recovery in the second half of the year. Coupled with recent dovish remarks from Council members and the "lively debate" during the last meeting, this indicates that the central bank should cut the refi rate (but not the deposit rate) by 25bp within the next five weeks. The exact timing of the rate cut is a close call. But our guess is that June is more likely than May, also because the ECB will have the 1Q13 GDP numbers at hand and will have finished its macroeconomic update procedure by then.

Soft data taking a breather also on a global level will not only leave CEE central banks in an easing mode, but should provide some ammunition for the more dovish US FOMC members, who have cautioned against ending QE3 too early. Otherwise, next Wednesday's Fed meeting is not expected to bring any changes in its current stance. The eagerly awaited US labor market report on Friday of next week should show the lackluster March result was just a “payback” for a very strong February reading rather than the beginning of labor market weakness, thus underpinning our expectation that the US recovery will gain traction again after the current dry spell.-FXstreet.com

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