Euro strengthens ahead of this afternoon’s ECB meeting
02/Jun/2016 • Currency Updates•
The Euro traded modestly higher against both the US Dollar and Sterling on Wednesday, ahead of this afternoon’s monetary policy meeting of the European Central Bank.
Attention in the currency market today will undoubtedly be focused on this afternoon’s meeting in Vienna, including the ECB’s interest rate decision and Mario Draghi’s press conference.
We think Draghi will reiterate that the ECB remains in wait-and-see mode, with no changes to policy likely to be announced. We may see revised economic forecasts from policymakers following an improved first quarter performance, although we don’t expect any major surprises with the monetary policy statement likely to strike a fairly neutral tone.
September now appears to be viewed as the earliest point when additional stimulus measures will be implemented, with the Governing Council to observe the effect of the recent stimulus on the economy before committing to more.
The ECB’s main refinancing and deposit rates will be announced at 12:45 UK time, with Draghi’s conference to take place 45 minutes later.
Yesterday, the US Dollar dipped again on dimming expectations that the Federal Reserve will hike interest rates later this month. Financial market pricing for a June interest rate hike has fallen back to around one in four, despite impressive manufacturing data in the US on Wednesday afternoon which boded well for second quarter economic growth.
The Dollar was hurt in part by a strong rally in the Japanese Yen following the announcement that the Bank of Japan would delay the implementation of its sales tax hike from 2017 to 2019.
Sterling also dipped yesterday despite a rebound in manufacturing growth in May. Governor of the Bank of England Mark Carney will be speaking in Oxfordshire at 14:00 UK time today, with any mention of monetary policy likely to influence the Pound this afternoon.
Major currencies in detail:
As we’re entering one of the most significant months in recent history for the UK, market volatility is expected to be extremely high. All eyes are rightly focused on the EU referendum and, whilst polls last week showed a strong leaning toward the ‘remain’ campaign, the latest poll released showed this assumption could be premature.
The Pound dipped 0.4% yesterday, with investors overlooking a return to growth in the UK’s manufacturing sector.
Markit’s monthly manufacturing PMI exceeded expectations in May, climbing back above the 50 level, which separates contraction and growth. The index rose above forecasts to 50.1 from 49.2, although the industry’s modest growth looks set to continue to provide a drag on overall economic activity in the second quarter.
Meanwhile, data yesterday showed that UK mortgage lending slowed to a crawl in April, increasing at its slowest pace since 2012 as a new tax on landlords took effect, while mortgage approvals also dropped.
Mark Carney will be the focus in the UK today, although this morning’s construction PMI could also draw some attention.
Despite a lack of major announcements, the Euro rose by 0.4% against the US Dollar as investors awaited today’s ECB meeting.
Eurozone manufacturing remained lacklustre in the month of May, according to Markit. The manufacturing PMI for the Euro-area was unchanged yesterday at a modest 51.5 despite a slowdown in both Germany and Italy, the latter slumping to a three-month low.
The Euro has remained mostly range-bound ahead of today’s ECB meeting. A more dovish or hawkish tilt from Draghi today could cause the Euro to break away from its recent range in the short term.
The US Dollar index declined by 0.2% on Wednesday despite improved manufacturing data.
ICM’s index of manufacturing activity increased unexpectedly in May, rising to 51.3 from 50.4 as pressure from a strong US Dollar begins to ease. This marks the third straight month the sector has registered a reading above the level of 50, which represents growth, following a baron five-month period of contraction.
This reinforces our view that the US economy is beginning to shake off global headwinds that weighed heavily on economic growth in the first quarter of the year.
Contrastingly, construction growth surprised to the downside, falling by 1.8% in April and marking its biggest monthly decline in five years.
Announcements in the US will likely take a back seat today, with market focus heavily on the ECB. However, jobless claims and the ADP measure of employment will both be worth noting ahead of tomorrow’s US labour report and crucial nonfarm payrolls figure.
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