Currency markets await crucial ECB statement today
22/Oct/2015 • Currency Updates•
Economic data from the US, Europe and the UK is light today, leaving the market attention solely on the European Central Bank (ECB) and its monetary policy statement this afternoon.
While we do not expect the central bank to announce additional easing measures, hints of a future expansion of its QE programme may result in the Euro falling against its major peers. This downward direction seems likely to be maintained over the medium term, as and when US and UK interest rates are increased.
Many UK businesses exporting to the Eurozone have recently taken the opportunity to hedge their Euro income, in order to protect their profit margins from further Euro weakness over the course of the coming year.
In the lead up to today’s announcement, the Euro fell slightly against both its major peers, while emerging market currencies sold-off across the board, including further sizable losses for the volatile Brazilian Real and South African Rand.
The Pound experienced a very modest appreciation against both the Dollar (+0.2%) and the Euro (+0.3%) yesterday, amid a relatively light day of announcements among the major economies.
Governor of the Bank of England Mark Carney spoke once again last night, this time from Oxford. He chose to avoid the topic of monetary policy, instead touching on Britain’s membership of the EU and the potential of a Brexit. Carney heavily backed maintaining EU membership, stating that it boosts the UK economy.
Earlier in the day, the latest public sector borrowing figures proved to be a GBP positive. Borrowing registered £8.628 billion in September, lower than the £10.7 billion reading a month previous, and considerably less than forecast. While encouraging, these figures show that the Government is still spending far more than its income.
With spotlight on the ECB today, data and announcements in the UK will likely take a back seat. Retail sales figures at 9.30am this morning are expected to show consumption in Britain accelerated in September, which could prove positive for Sterling.
The single currency dipped by 0.1% against the Dollar yesterday, with movement limited as investors brace for today’s ECB announcement.
A series of underwhelming data prints, notably a complete lack of inflationary pressure, has ramped up pressure on the central bank to increase the quantitative easing programme launched back in March this year. Inflation has been close to or below zero for the past eight months and well below the central bank’s 2% target, despite the existing 60 billion Euros a month stimulus package.
While we see it likely that President Draghi will leave the door open to an expansion of the central bank’s QE programme, we also acknowledge the low chance of a more hawkish than expected stance, with little change from the September statement. This unlikely scenario would provide good support for the single currency. However, consensus is that Draghi will hint at an expansion in the short term, possibly at the December ECB meeting.
The ECB interest rate decision will be announced at 12.45pm today, with the statement and press conference at 1.30pm (both London time). As always with these significant monetary policy announcements, volatility and unpredictable currency movements are to be expected.
Modest gains against the major currencies caused the US Dollar index to climb by 0.1% yesterday.
Despite little US economic news, the Dollar gained against most emerging market currencies, notably posting sizable appreciation against the volatile ZAR and RUB.
Mortgage approvals for last week were impressive again after the previous week’s miss, registering a 11.8% increase.
Later in the day, after UK markets closed, FOMC member Jerome Powell spoke at a press conference in New York. As has been the norm among Fed members of late, Powell failed to comment on the Fed’s monetary policy stance.
Similarly to the UK, economic data in the US will likely take a back seat today. Jobless claims will provide a further indication of labour market strength ahead of next month’s nonfarm payrolls report, while home sales and house price data could cause additional USD volatility.
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