Euro tumbles after ECB’s Draghi opens door to December stimulus
23/Oct/2015 • Currency Updates•
Volatility created by a thoroughly dovish European Central Bank press conference yesterday allows businesses to capitalise on the rapidly devaluing Euro.
The Euro plunged against almost all of its major peers yesterday afternoon after Draghi all but confirmed that the ECB would be expanding its existing quantitative easing programme at its next meeting in six weeks’ time. This will likely put further downward pressure on the currency in the short, mid and long term. This would be good news for UK businesses importing from the Eurozone, while exporters may suffer as their products become relatively more expensive.
December now looks set to be a very busy and potentially volatile month in the currency markets. Not only because of the ECB’s potential expansion of the QE programme at its meeting on the 3rd, but we also still expect the US Federal Reserve to hike interest rates on the 16th.
As we’ve been saying all year, this divergence in monetary policy stances between the major central banks should continue to drive the Euro lower against the US Dollar and the Pound, given the Bank of England also looks on course for a hike in Q2 of next year.
Major currencies in detail
Strong domestic data was not enough to prevent the Pound weakening against the Dollar by 0.3% yesterday. Unsurprisingly, however, there were strong gains for Sterling against the Euro.
Earlier in the day, retail sales data for September far exceeded expectations, and provided strong support for GBP. Sales soared by 6.5% on an annualised basis after a 1.9% increase last month. This was well above forecasts, with sales registering their largest expansion in almost two years, bolstering by increased revenue generated from the Rugby World Cup.
This robust level of consumer spending provides further weight to the argument that the Bank of England will hike interest rates sooner rather than later. Sales excluding fuel also soared, rising by 5.9% on a year previous.
No data out in the UK to end the week means attention will turn to releases elsewhere.
The Euro was driven sharply lower following the ECB press conference, depreciating by a massive 1.9% against the US Dollar and by 1.5% versus Sterling. The single currency ended trading around a one-month low against the Greenback.
In his statement Draghi highlighted downside risks to both the growth and inflation outlook in the Eurozone. Headline inflation is expected to remain low for a “protracted amount of time”, with expectations for price growth declining in the short term. Draghi reiterated the stimulus programme will continue at least through September 2016, and longer if needed.
Critically, and in line with our expectations, he also indicated that there may be an expansion of the existing programme before the end of the year. Draghi claimed the Governing Council would need to “re-examine” the level of monetary stimulus at its December meeting.
The ECB is also considering other measures to stimulate the economy, including pushing the interest rate on bank deposits at the ECB even further into negative territory. A change in the central bank’s stance, from “wait and see” to “work and be ready”, strongly suggests that we’ll see action from ECB policymakers over the coming months.
A string of PMIs from Markit this morning will be the focus today. Reaction to yesterday’s ECB announcement will continue to dominate Euro trading patterns.
Heavy downward pressure on the Euro yesterday was good news for the US Dollar, which soared by 1.3% against its basket of major peers.
The Dollar’s rally was given further weight by another very impressive set of jobless claims figures that went under the radar given the ECB announcement. Jobless claims dropped to 259,000 last week, with the four-week moving average plunging to its lowest level in over four decades. The 263,250 average is the lowest recorded since way back in 1973.
This provides further evidence of a tightening in labour market conditions, which will be good news for Federal Reserve hawks, and those supporting a December FOMC hike.
Elsewhere, existing home sales also exceeded expectations, rising by 4.7% last month. The house price index also increased by 0.3%, pointing to a further improvement in the US housing market.
Manufacturing growth from Markit this afternoon, the only data point in the US today, is set for release at 2:45pm.
Receive these market updates via email