Euro recovers versus US Dollar on dampened easing expectations

Enrique Díaz-Álvarez21/Oct/2015Currency Updates

Yesterday did little to ease the many questions that both businesses and the global investment community have surrounding the big three’s monetary policy stances.

During his speeches yesterday, Bank of England (BoE) Governor Mark Carney failed to give any indication on what his next interest rate decision may be. However, Monetary Policy Committee Member Ian McCafferty continued to express his hawkish stance.

UK and European businesses will be eagerly awaiting this evening’s speech from Mark Carney at 6:00pm at an event in Oxford. He is expected to spell out the BoE’s views on the financial implications of leaving the EU. This is likely to include the effects of a Brexit on the central bank’s mandate of controlling inflation and protecting financial stability.

Markets will also look to the results of the ECB meeting tomorrow, where Mario Draghi could hint at a possible expansion of the central bank’s quantitative easing programme.

As always, eyes are also focussed on the US interest rates hikes. New home additions printed positive yesterday. However, Federal Reserve Chair Janet Yellen failed to comment, so the markets will continue to watch her moves and statements closely.

Major currencies in detail:

GBP

Early gains for Sterling against the Dollar were wiped out yesterday, and the currency ended 0.2% lower.

While Carney disappointed, meaningful commentary for the Pound came from longstanding MPC hawk Ian McCafferty, the sole dissenter among policymakers at the previous three monetary policy meetings. McCafferty showed no signs of softening his stance on interest rates, suggesting that the UK must not fall “behind the curve” on rates.

Speaking at Bloomberg’s headquarters in London, he also reiterated the Bank’s need to raise rates gradually, in order to minimise disruption to households and businesses. Unsurprisingly he claimed that risks to the economy were increasing, although he was not isolated in this view among rate setters. This suggests that we will likely see additional dissenters in the BoE’s MPC over the coming months.

As well as the speech from Mark Carney this evening, public sector net borrowing figures this morning will be worth noting at 9:30am.

EUR

The single currency appreciated by 0.2% against the US Dollar yesterday, after the release of strong lending data.

The European Central Bank revealed that Eurozone banks have loosened lending standards more than expected over the past few months, possibly lessening the need for the Governing Council to expand its existing quantitative easing programme.

However, ahead of tomorrow’s ECB meeting, Bank of Spain Governor Luis Maria Linde suggested that the Governing Council could both extend and modify its asset purchasing programme in order to boost inflation and growth in the Eurozone. Unsurprisingly, he also claimed that current inflation levels were “worryingly below target”.

Earlier in the day yesterday, it was revealed that producer prices in Germany slipped further in September. The producer price index dropped by 0.4% last month, down by 2.1% on an annualised basis to record its sharpest fall since February, with declining energy prices once again being the main culprit.

Meanwhile, the current account surplus for the wider Euro-area lessened considerably in August. The surplus shrank to €13.7 billion from just under €38 billion.

Today holds no significant data releases in the Eurozone, meaning that attention will turn to announcements elsewhere.

USD

A mixed session for the Dollar saw the currency end just 0.1% down, after a rally late in the day.

US economic indicator data yesterday was fairly mixed. US housing starts, which measures how many new single family homes were constructed, rose more than expected in September in another sign of continued improvement in the housing market.

The monthly figure increased by 6.4% to1.21 million units following increased demand for rental apartments. Building permits remained strong, although dipped slightly to 1.103 million. Housing remains a bright spot in the US economy, which otherwise has been hampered by a strong Dollar and soft global demand.

A couple of speeches from Federal Reserve members Powell and Dudley had limited effect on the Dollar yesterday, with neither touching on the subject of monetary policy. Similarly, Chair Janet Yellen avoided commenting on the FOMC’s plans.

Significantly, the US Treasury called on China to allow an appreciation of its currency, the Yuan, in order to support the rebalancing of its economy.

A relatively data light day in the US today, with mortgage applications at midday unlikely to cause any Dollar volatility. Another speech from Fed member Powell after UK markets close at 6:30pm London time is worth noting for any monetary policy clues.

 

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Written by Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.