Euro sinks as Draghi claims ECB ready to act in March
16/Feb/2016 • Currency Updates•
The Euro recommenced its downward path against its major peers on Monday after President of the European Central Bank Mario Draghi reiterated that the Governing Council is ready to ease monetary policy at their next meeting in March.
In line with our long standing expectation for further stimulus, Draghi claimed that the central bank would not hesitate to act should the latest financial market turmoil and declining energy prices affect the Eurozone’s price stability.
We remain of the opinion that the ECB is now all but certain to cut its deposit rate further into negative territory next month, with a good chance we’ll see an expansion to the already sizable 60 billion Euros a month quantitative easing programme. This should, in our view, ensure a gradual long term depreciation of the single currency against both the US Dollar and Pound.
For UK importers this depreciation in the Euro would lead to slow, but consistent, cost decreases for their EUR denominated invoices. However for UK exporters, who sell in Europe but price in GBP, it’s worth noting that their goods or services will become relatively more expensive for their Eurozone customers and thereby increasingly uncompetitive.
Financial markets worldwide calmed on Monday, with stock markets across the globe stabilising after a stronger Chinese Yuan eased fears of global deflation. The Yuan appreciated to its strongest position so far in 2016 in its first trading day after the long Lunar New Year holiday. People’s Bank of China had previously moved the currency’s fixing point and signalled its commitment to a stable currency.
Sterling traders today await the latest inflation figures in the UK this morning ahead of a busy week of economic data. However, negotiations around the UK’s changing relationship with the European Union will dominate ahead of Thursday’s summit in Brussels.
Major currencies in detail:
Sterling had a mixed day on Monday, ending 0.1% higher against the Euro and 0.6% down versus the Dollar.
The Pound benefitted from an improvement in risk appetite yesterday, although gains were checked by lingering concerns surrounding the future of Britain as part of the European Union ahead of this Thursday’s EU summit. Foreign Secretary Philip Hammond claimed that negotiations with David Cameron and EU leaders would go ‘right to the wire’. An agreement on Thursday could lead to a referendum as early as June.
Earlier in the day, the latest housing data from online property website Rightmove suggested that the UK housing market picked up steam this month with average house prices in the UK jumping to a record high just shy of 300k.
On the topic of monetary policy, MPC member Ian McCafferty claimed that inflationary pressure in the UK had fallen, although the next move would still likely be an interest rate hike, as is our expectation.
President Draghi comments, combined in part with the stabilisation in stock markets, sent the Euro sharply lower against the US Dollar by 0.6%.
Speaking at the European Parliament’s Economic and Monetary Affairs Committee yesterday afternoon, Draghi’s comments echoed similar statements made following the central bank’s January monetary policy meeting. The ECB appears confident that the existing QE programme is working, although clearly remain committed to do whatever it takes to ensure price stability. There are a ‘variety of instruments’ at its disposal to help reach the 2% inflation target.
Meanwhile, the latest trade figures showed that the Eurozone’s hefty trade surplus edged up in December to €24.3 billion.
This week will see mostly second-tier economic announcements in the Euro-area ahead of Thursday’s ECB meeting accounts, which could shed even more light on the central bank’s plans for further easing in the coming months.
The US Dollar gained by 0.7% against its major peers yesterday, fuelled by a sharp decline in the Euro and Japanese Yen.
Trading was thin in the US on Monday, with markets closed due to President’s Day. The rebound in stock markets, however, provided strong support for the Greenback, causing a reversal of safe-haven flows from earlier in the month, which had seen the US Dollar fall to its weakest position since mid-October.
With little economic announcements across the pond again today, attention will turn to the release of the Federal Reserve’s meeting minutes on Wednesday evening and January inflation data on Friday.
Rest of the world
Poland’s central bank claimed it was ready to intervene in the currency market following the Zlotys sharp decline so far this year.
Elsewhere, commodity-driven currencies such as the Russian Ruble, which has suffered in recent months, gained after oil prices rebounded from last week’s thirteen year lows.
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