Currency markets await crucial ECB quantitative easing announcement
03/Dec/2015 • Currency Updates•
Focus in the currency markets today will be firmly fixed on the European Central Bank (ECB) which looks on course to announce an expansion in its monetary easing measures following its December meeting.
President of the ECB Mario Draghi will be speaking at 13:30pm today, and is widely expected to announce the Governing Council will be ramping up its quantitative easing programme.
We expect the rate of purchases to be increased to 80 billion Euros from 60 billion Euros, as well as a cut in the deposit rate to -0.4% from -0.2%. This should keep the Euro under pressure today, with more easing measures likely forcing the single currency lower towards parity against the US Dollar at some point in early 2016.
Economic data yesterday provided further fuel to the argument that the ECB will act today, after inflation in the Euro-area disappointed once again in November. The rate of price growth declined to just 0.1% last month, while core inflation, which strips out the effect of the oil price plunge, grew by just 0.9%, its lowest level in three months.
Meanwhile, Fed Chair Janet Yellen fuelled hopes of a December US rate hike by claiming she saw an improving US economy, and risks of waiting to increase interest rates. Yellen suggested that data since the latest meeting has been consistent with an improving labour market and confidence that inflation is moving back towards its target.
Major currencies in detail:
The Pound suffered throughout trading yesterday, down by 0.9% versus USD, with more weak economic data suggesting that the Bank of England could be a long way off hiking interest rates in the UK.
Construction growth in the UK was the second PMI this week to disappoint expectations, suggesting the British economy may be set for an economic slowdown in the final quarter of the year. The latest construction PMI from Markit missed even the most pessimistic of forecasts, declining to 55.3 from 58.8, a full three points below expectations. The poor data, which marked a seven-month low in the figure, follows a similar miss on Tuesday in the manufacturing survey.
Construction was hampered by the weakest expansion in housing activity since mid-2013, with growth also softening in the commercial construction and civil engineering sectors. This provides further evidence that the Bank of England will refrain from hiking interest rates until well into 2016.
Markit services data this morning will largely be overshadowed by the ECB decision.
The Euro continued to be driven lower yesterday, down by 0.3% versus the USD in anticipation of more easing from the ECB today.
Economic data yesterday continued to point to a lack of inflationary pressures in the Eurozone economy. The underwhelming consumer price index figures were followed up with more weak producer price data, with the producer price index falling by 3.1% in November.
All attention now shifts to the ECB, in what is seen as the central bank’s most anticipated meeting since January when easing measures were initially announced.
The central bank will be announcing its decision on rates at 12:45pm, although more importantly, Draghi will be presenting the monetary policy statement and press conference at 13:30pm, all London time.
The US Dollar was given a sizable boost by a weak Euro and encouraging labour data yesterday, with the US Dollar index rising by 0.6% as a result.
ADP’s measure of private sector employment, seen as a good gauge for the more critical nonfarm payrolls figure, rose to its highest level in five months in November. Employment increased by 217,000 last month, providing further evidence that the labour market in the US is sufficiently strong enough to warrant an interest rate hike by the Federal Reserve this month. Encouragingly, nonfarm productivity also rose by 2.2%.
Meanwhile, Fed member Lockhart claimed that a 25 basis point cut would not materially influence consumer spending, while also suggesting that a stronger Dollar was likely after a Fed hike.
Focus will be on Yellen again today, who will be testifying in front of Congress this afternoon.
Rest of the world
The Polish and Canadian central banks both kept rates unchanged yesterday, with the Canadian Dollar strengthening after a less dovish than expected statement.
Receive these market updates via email