ECB’s hints of further easing calm global markets, sink Euro
25/Jan/2016 • Currency Updates•
We saw yet another week of market volatility and falls in asset prices until Thursday’s European Central Bank press conference finally soothed the markets. The ECB fully validated our out-of-consensus expectations that we’ll see further easing in the first half of 2016, and President Mario Draghi strongly suggested that this may come as early as their next meeting in March.
Global markets breathed a sigh of relief and risk assets rallied, including equities, commodities and emerging market currencies.
The other side of the coin was the renewed downward pressure on the Euro, which ended the week down against every major currency with the exception of the Swiss Franc and the Japanese Yen. Our clients are largely taking advantage of the post-ECB Euro sell-off and look to sell it at the currently more attractive levels in a variety of crosses.
Sterling finally managed to stabilise against the US Dollar and manage its first weekly bounce against the Euro in weeks. However, dovish comments from the Bank of England’s Mark Carney, expected volatility in connection with the UK referendum on the EU exit and the absence of wage pressures despite the labour market, lead us to delay our call for a BoE hike until the fourth quarter of 2016. We’ll be revising our Sterling estimates modestly lower against the US Dollar as a result.
Major currencies in detail:
The key November labour report delivered more of the same in the UK.
Unemployment continues to drop, and is now the lowest since the fall of 2005, at 5.1%. However, the strong labour market has yet to translate into wage pressures. Core weekly earnings dropped 0.1% to 1.9% on the year.
Quite dovish comments made last week by Governor Carney focused almost exclusively on the reasons not to hike rates. He also continued to express puzzlement over the absence of wage pressures, even as the labour market tightens, and concern for the downward risks posed by recent financial volatility.
It’s quite clear that the eight-member majority in the monetary policy committee for holding rates steady is unlikely to change any time soon. Due to the above factors we have decided to push back our call for the first BoE hike until the fourth quarter of 2016.
After a steady few weeks, the common currency recommenced its downward trend against the US Dollar on the back of rather aggressively dovish statements from ECB President Draghi. The possibility of further easing in March, which is much earlier than the markets are currently pricing in, caused the Euro to fall to its lowest position in two weeks against the US Dollar.
Further, Draghi said inflation is likely to remain very low, even in negative territory, with downside risks from abroad having increased since the December meeting.
Economic news heaped further pressure on the Euro on Friday. The preliminary release of the critical PMI business sentiment surveys for January provided a significant downward surprise. The composite index came out down nearly a full point, to 53.5, the lowest level in almost a year. It appears that recent market volatility is affecting business confidence and we think it’s almost certain that we’ll see further easing measures announced at the ECB’s March meeting.
Focus in Spain continues to be on the very difficult task of forming a stable government following the December elections. For now, markets and the economic outlook appear to be taking the instability in their stride. Economics Minister De Guindos hinted that next week will see yet another strong employment figure and Spanish sovereign bonds have actually kept in line with those of Italy, a sign that investors are not yet worried about instability.
The only economic news of note last week in the US was a lower-than-expected inflation print, weighed down by lower food prices. However, the more relevant core inflation number, which excludes the volatile food and energy components and is a better indicator of the true state of inflation, actually ticked up by 0.1% to a solid 2.1% on the year, the highest level since 2012.
All eyes turn to the Federal Open Market Committee meeting this week. The Fed is universally expected to leave rates on hold but the tone of the accompanying statement will be key to gauge the extent to which financial market volatility is affecting the FOMC’s intention to hike rates by roughly 0.25% each quarter.
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