Euro slide continues as expectations build up for ECB meeting
01/Sep/2014 • Currency Updates•
Last week the euro continued its downward trend. The inability of the common currency to find support in spite of extreme short positioning among traders is certainly noteworthy. We note that consensus among economists and strategists is coming around to our view that the ECB will announce further easing measures next week; last week Eurozone inflation data, showing yet another drop to barely positive 0.3%, validates the fears expressed by President Draghi in his Jackson Hole speech.
Outside of the euro, financial markets are taking a relaxed view of the Eurozone woes and increased tensions in the Ukraine. Sterling actually outperformed the dollar slightly, and US stocks rose to yet another record high.
A slow summer week in UK financial markets. Mixed CBI activity data in the three-months for July were roughly consistent with a mild slowdown in third-quarter growth to the 2.5-3% range. Trading in sterling mostly reflected concerns about deflationary pressures in the Eurozone and the prospects by more aggressive action by the ECB, and GBP rose 0.6% against the common currency while ending the week slightly up against the US dollar.
We have been warning for some months that further aggressive easing by the ECB was in the cards, as early as the September meeting next week. President Draghi’s Jackson Hole speech started to move economic consensus in that direction; last week’s round of dismal macroeconomic data appears to have convinced most sceptics. Eurozone inflation fell yet again to 0.3% YoY. Particularly worrisome is the entrenchment of deflation in Spain, where inflation fell to -0.5% YoY. Economic sentiment dropped again in the Eurozone, and the fall was very sharp in Italy, which is shaping up as the next potential focus of concern about sustainability of peripheral economies. Finally, Eurozone-wide bank lending fell in July.
With all leading indicators pointing out to further weakening in Eurozone growth, the only immediate relief will come from the external sector. Therefore, the continued fall in the euro is just about the only positive development for the Eurozone. However, it is far from sufficient and we expect to see some action at the ECB meeting on Thursday.
Last week brought mixed economic news across the Atlantic. Second quarter growth was revised 0.3% higher, to 4.2%. July data was mixed, with weaker consumer spending offset by very strong reports on capital expenditure. Overall, last week’s news was consistent with our expectation of 3-3.5% third-quarter growth. This should be enough to keep the Fed on track to end purchases of assets in October, and look to hike rates at some point in the first half of 2015. All eyes are now on the August payroll report next Friday. This will come on the heels of the ECB meeting on Thursday, and will make for a very volatile end to the week’s trading.