ECB President Draghi sends the Euro lower on hints of additional QE
22/Jan/2016 • Currency Updates•
The Euro was sent sharply lower across the board yesterday, after some very dovish comments from European Central Bank President Mario Draghi on Thursday afternoon, following the Governing Council’s January monetary policy meeting.
The single currency recovered somewhat as the day progressed. We’ve seen UK businesses with Euro inflows capitalising on the currently advantageous rates before the retrace that currency forecasters have been predicting.
Fully validating our expectations, Draghi left the door firmly open to additional easing at the coming meetings, possibly even as early as March. This is much earlier than the markets are currently pricing in, and subsequently sent the Euro to its lowest position in two weeks against the US Dollar.
Inflation is expected to remain very low, even negative with downside risks from abroad increasing since the December meeting, given the latest bout of financial market volatility.
With oil prices unlikely to show any meaningful pick-up in the coming months, yesterday’s comments from Draghi have reaffirmed our view that the Governing Council will expand its asset purchasing programme at some point in the first half of 2016. This, in our view, should recommence the Euro’s sharp downward trend against almost every major currency, particularly the US Dollar.
The latest manufacturing and services PMIs in the Eurozone are worth noting today, while retail sales in the UK could provide a further indication as to the strength of domestic demand in the UK economy.
Major currencies in detail:
Sterling received some much needed respite from its recent sell-off yesterday following comments from Prime Minister David Cameron, rallying hard against both its major peers to end 0.3% up against the US Dollar.
The major news for the UK economy came from Davos, and the World Economic Forum. Cameron warned of a Brexit ‘disaster’, calling on businesses to support the UK’s bid to stay in the EU, allaying some fears among investors that the UK would leave the European Union. Many UK businesses continue to voice their desire to remain within the EU, the country’s largest trading partner, although argue that reforms are needed.
Cameron is aiming to strike a deal for Britain’s EU membership at the next council meeting in February in order to pave the way for a referendum, possibly even as early as the summer.
Hints of additional quantitative easing from Draghi yesterday sent the Euro 0.5% lower against the US Dollar and 0.8% versus the Pound, during the London session.
Speaking in Frankfurt yesterday, Draghi continued to stand by the existing measures put in place by the Governing Council to boost the stagnant Eurozone economy. He reiterated rates would remain at low levels for an ‘extended period’, while suggesting that the ECB has ‘no limits’ to what action it can take.
Unsurprisingly, the ECB is concerned about the growing downside risks from abroad, namely in China and oil prices, and as such, policy measures will be reviewed at the next meeting. We remain of the opinion that the central bank will increase asset purchases in the coming months, possibly even as early as March, with a strong chance that the deposit rate will be cut even further into negative.
Despite rallying to a six-week high after the ECB meeting, the US Dollar index fell in the afternoon session to finish 0.2% higher.
There was some surprisingly weak jobless claims figures in the US on Thursday, providing a blip to the general positive labour market data we’ve seen out of the US economy of late. Claims last week rose sharply to a seven-month high of 293,000, with the more representative four-week moving average increasing to 285,000, its highest level since mid-April.
However, despite relatively weak claims figures of late, there are little signs of a weakening in a US labour market that otherwise continues to go from strength to strength.
Elsewhere, there was some welcome, good manufacturing data after the Philly Fed manufacturing survey increased, albeit still remaining bearish at -3.5.
There’s limited economic data in the US economy to end the week, with home sales and manufacturing growth likely to cause only limited currency movement.
Listen to what our Strategy Analyst Matthew Ryan told Share Radio about recent market movements.