ECB to hold steady, Trump takes office

By Jonathan Cable

LONDON (Reuters) - European Central Bank officials are unlikely to make any change in policy on Thursday, while data from the United States will help the Federal Reserve decide whether to immediately follow December's rate increase with another.

Recent data from the euro zone suggests the bloc's economy ended 2016 on a solid footing, and last month the ECB surprised markets by saying it would trim its monthly bond purchases to 60 billion euros ($63.86 billion) starting in April.

So none of the economists polled by Reuters this week expect any change at Thursday's meeting. They were unanimous in saying the ECB's next move, after April's planned cut, will be to taper quantitative easing further [ECILT/EU].

"Next week's ECB meeting should be a non-event. After the December decision to extend QE at a slower pace, the ECB is almost on an autopilot for the rest of 2017," said James Knightley at ING.

However, a rebound in prices in December is reviving calls for the ECB to taper its bond purchases, particularly in Germany. Many Germans feel low rates are eating into their savings and fuelling a property bubble while inflation is already close to the ECB's target of almost 2 percent.

But protectionist sentiment is growing after Britain voted to leave the European Union and Donald Trump won the U.S. presidential election. Several elections in EU countries this year could have far-reaching political ramifications and even threaten the euro zone itself. That is likely to stay the ECB's hand for now.

In the press conference after the policy announcement, ECB President Mario Draghi will probably also face questions over the hacking of his email account during his tenure as governor of the Bank of Italy.

It is not yet clear what the hackers got their hands on. But the idea of a leak of sensitive information ranging from monetary policy to emergency measures for Greece will be of concern.

TRUMP STUMP

ECB officials are growing increasingly worried Trump's victory in the U.S. presidential race may harm the euro zone by hurting trade with the U.S and fuelling populism.

Speaking publicly and behind the scenes, officials emphasize any U.S. shift toward protectionism could hurt the already fragile euro zone economy and pave the way for an even stronger backlash against globalization and the euro project.

Trump gave little new policy information at a press conference on Wednesday, but his protectionist statements have kept many investors from adding to risky positions.

The president-elect has threatened to impose retaliatory tariffs on China, build a wall along the Mexican border and tear up the North American Free Trade Agreement (NAFTA).

Before Trump's inauguration on Friday, and their next policy announcement on Feb. 1, several Fed policymakers are due to speak, and they are likely to send an upbeat message.

Inflation, industrial production and housing-start numbers are all expected to signal a strengthening economy, giving the Fed scope to follow up December's rate increase with more tightening this year.

Its Federal Open Market Committee is expected to hike twice more in 2017 and recent comments from policymakers suggest there could be a third move too. [FED/R]

"The FOMC continues to predict only gradual increases in the federal funds rate, especially given the uncertainty surrounding the economic agenda of Trump's administration," Credit Suisse economists told clients.

"We continue to see two additional hikes in 2017, but acknowledge that the outlook is subject to change in months ahead."

BEGINNING OF BREXIT

Britain's shock decision in June to leave the European Union has sent sterling tumbling. Although the economy has so far fared better than expected, inflation numbers on Monday will probably show prices jumped in December as imports became more expensive.

Prime Minister Theresa May has said she will trigger Article 50, starting the formal withdrawal from the EU, by the end of March. Many think she will take a hard line on immigration at the cost of Britain's access to the single market, hindering trade.

"The government has sent clear signals that the UK will leave the Single Market, a so-called 'hard Brexit'," said Sarah Hewin at Standard Chartered.

May is due to speak on Tuesday, setting out the approach her administration will take to Brexit. If she does indicate away from a soft Brexit, sterling will probably fall further.

(Additional reporting by Francesco Canepa in Frankfurt, editing by Larry King)

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