Revised European Central Bank forecasts fail to inspire Euro
03/Jun/2016 • Currency Updates•
The Euro fell against both its major peers on Thursday, with investors generally left underwhelmed by the European Central Bank’s downbeat set of growth and inflation forecasts yesterday afternoon.
There were no major surprises from the ECB, which left its main interest rates and quantitative easing measures unchanged.
ECB President Mario Draghi hit a fairly neutral tone, disappointing some commentators who had expected a modestly hawkish sentiment from the ECB. Draghi reiterated that risks remained ‘tilted to the downside,’ with the possibility of a Brexit, something that the ECB is now actively against, a key concern for the central bank.
The ECB also announced only a very modest upgrade to both its near-term growth and inflation forecasts, despite the recent raft of additional easing measures. Inflation expectations for 2016 were bumped up to just 0.2% in response to higher oil prices, although the forecast for 2018 was actually knocked back by 0.1%. Growth forecasts were also tweaked slightly.
While Draghi mentioned that the balance of risks to the projections had improved modestly, he also insisted that the ECB was ready, willing and able to increase stimulus if the current measures in place failed to achieve their goals.
Overall, the ECB is clearly in wait and see mode. It will spend the next few months carefully monitoring the impact of its current stimulus programme, and we would expect no great changes in either rhetoric or policy until at least the September meeting.
International businesses’ attention now shifts firmly to this afternoon’s labour report in the US, which should provide a firmer indication as to whether the Federal Reserve is likely to hike interest rates later this month. A nonfarm payroll number around or in excess of the forecast 160,000 mark could bring forward rate hike expectations and provide solid support for the US Dollar today.
Major currencies in detail:
Sterling was range-bound against the US Dollar yesterday, with no major data releases meaning the currency ended a modest 0.1% lower.
Announcements in the UK economy mostly took a back seat on Thursday, especially after BoE Governor Carney failed to touch on monetary policy in his speech.
Yesterday’s construction PMI for May was a disappointment, further fuelling concerns of an economic slowdown in the UK in the first half of the year. The index fell more than expected to 51.2 from 52, with most firms in the survey reporting declining orders for the first time since April 2013.
Uncertainty in the run-up to the EU referendum on 23 June looks set to drag overall UK growth lower in the second quarter.
The single currency dipped 0.4% against the US Dollar and 0.45% versus Sterling, despite a fairly uneventful press conference from the ECB.
Yesterday’s decline in the Euro was largely due to the ECB’s failure to make any meaningful upward revision in either growth or inflation forecasts.
Away from the ECB meeting, producer price figures highlighted the ever growing need for more stimulus measures in the Eurozone economy. Producer prices fell more than expected and in the process registered the largest annual decline in over six years. On an annualised basis, prices fell by 4.4%, largely due to slumping oil prices which are 30% lower than 12 months previous.
Service sector growth and retail sales figures this morning could draw some attention, although traders will be heavily focused on this afternoon’s labour report in the US.
A weak Euro contributed to the US Dollar index rising 0.25% yesterday.
The US Dollar was given a further boost by some encouraging labour data out of the US economy.
Private sector employment figures released on Thursday boded well for this afternoon’s nonfarm payroll release. According to ADP, job creation in the private sector increased by a very healthy 173,000 in May, with the previous number for April also revised upwards by 10,000 to 166,000. Similarly, initial jobless claims also impressed, falling again to a five-week low of 267,000.
The US labour report will be the focal point in trading today. The nonfarm payroll figure, employment rate and average earnings will all be worth noting when released at 13:30 UK time.
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