European Central Bank expected to ramp up stimulus measures today
10/Mar/2016 • Currency Updates•
All attention among businesses with foreign exchange exposure today will be on Frankfurt and the monetary policy meeting of the European Central Bank. The Governing Council’s interest rate decision at 12:45 UK time will be followed by a press conference chaired by ECB President Mario Draghi at 13:30 UK time.
I’ll be hosting a Twitter chat with Dan Davies, Senior Research Advisor at Frontline Analysts, and my colleague Enrique Diaz-Alvarez during the press conference. Join in by using the hashtag #EburyChat16.
Draghi is widely expected to announce an increase in the central bank’s monetary stimulus measures, a move that we believe will recommence the Euro’s sharp downward path against most of its major peers.
The prospect of further monetary easing in the Eurozone has already sent the Euro 3% lower against the US Dollar since mid-February. Businesses with Euro exposure are continuing to seek hedging solutions in anticipation of the currency’s potential decline.
We forecast an additional 10 basis point reduction in the central bank’s deposit rate, already negative at -0.3%, with the strong possibility of an expansion in the existing 60 billion Euros a month quantitative easing programme.
We may perhaps also see measures to support the banking system from a regulatory and capital needs perspective. Regardless of the outcome, volatility and large currency movements among the major currencies are to be expected.
In the lead-up to today’s announcement, the Euro rallied against its major peers on Wednesday despite a lack of any economic announcements. An improvement in manufacturing production in the UK provided some support for Sterling, which showed resilience despite recent concerns surrounding the upcoming EU referendum.
Away from the G4 currencies, the Canadian Dollar spiked to its strongest position against the US Dollar since November after the Bank of Canada held rates constant and calmed talk of an economic slowdown.
Major currencies in detail:
Positive economic data in the UK sent the Pound 0.2% higher versus the US Dollar yesterday.
Economic production in the UK got off to a good start to the year following its poor finish to 2015, thanks in part to a rebound in the manufacturing sector. Manufacturing output in the month to January rose by 0.7%, its highest level in four months, reversing a recent slump that has seen production fall for three straight months.
Industrial production also increased for the first time since October, rising by 0.1% and suggesting the recent economic slowdown in the UK economy may not be as bad as first feared.
The latest economic growth forecast from NIESR was not so encouraging. The estimate for the three months to February of just 0.3% was its lowest in almost three years.
No economic data whatsoever in the UK on Thursday means that Sterling movement will likely be driven almost exclusively by events in the Eurozone today.
The Euro staged a late rally during London trading yesterday, ending 0.5% higher against the US Dollar ahead of today’s ECB decision.
Trading was quiet in the Eurozone on Wednesday as traders and economists awaited this afternoon’s ECB meeting.
With inflation back into negative and the latest PMI indicators taking a plunge of late, the market is now overwhelmingly pricing in aggressive monetary stimulus at today’s meeting. A lack of action will be seen as a severe disappointment and put significant upward pressure on the Euro, which is the last thing the Eurozone needs at this juncture. We do not think Draghi can afford to disappoint the markets.
Trade data in Germany this morning will largely be overlooked, with all attention on this afternoon’s ECB announcement.
The US Dollar was little moved again on Wednesday, ending the session 0.3% lower against its major peers.
Announcements out of the US economy continue to be on light side this week, with traders awaiting next week’s Federal Reserve interest rate decision.
US wholesale inventories unexpectedly rose in January according to the latest data, increasing by 0.3%. The increase in the measure, which represents the amount of unsold inventory still in possession of US wholesalers, does not bode well for economic growth prospects at the beginning of the year. Inventories, which are a key component of US GDP, have provided a drag on growth since the third quarter of last year.
Weekly jobless claims in the US today will be completely overshadowed by the European Central Bank’s meeting this afternoon.
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