07 June 2019: ECB struggling to aid a recovery

ECB struggling to aid a recovery

June 7th: Highlights

  • Eurozone economy at the mercy of global events
  • NFP expectations cut
  • Sterling awaits new PM as May departs

ECB “a year away” from a rate hike

In his monthly news conference following the monetary policy meeting of the ECB’s General Council, Mario Draghi was dovish even by his own standards.

Any change in interest rates is unlikely to happen before H2 ‘20. Sr Draghi conceded that there are still some conversations taking place about a further cut in rates, with the return of QE also being discussed.

Draghi continues to place most of the blame for the slowdown in the Eurozone economy on “global factors” adding that rising protectionism threats and the vulnerability of emerging markets have taken their toll. This was Draghi at his most dovish, as he also appeared to have accepted that both he and the ability of the ECB to stimulate growth are close to the end of the road.

Draghi, who will be remembered for his famous “whatever it takes” speech at the height of the financial crisis and for never having presided over a rate hike during his eight-year tenor, looks like he is leaving the Presidency with the economy still struggling to find a solid base.

His calls for greater integration of fiscal as well as monetary policy are still some way from fruition as the rise in nationalism threatens the very basis of monetary union.

The ECB’s dovish tone is driven more by a lack of policy tools than any complacency as the recent EU elections have provided a background under which more negotiation will be necessary, given the makeup of the Parliament, which will see more policies lack the support to be approved.

Yesterday, the euro gyrated on the back of the ECB meeting, trading between 1.1309 and 1.1200. It closed at 1.1276 having opened at 1.1221.

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It’s NFP day!

There will be a suspension of reality this afternoon in the FX market as the U.S. Department of Labour releases its employment report for May, a report more colloquially as the non-farm payrolls. This report, usually released on the first Friday of the month, generally sets the tone for the markets short-term expectations for the dollar.

Occasionally, such as this month, the report is delayed as there simply isn’t enough time to correlate the data if the first of the month is also the first Friday or it falls on a Saturday.

The market’s prolonged agony has allowed other data to be released, most importantly PMIs for both manufacturing and trade. The data was mixed with manufacturing, surprisingly to the downside, and services seeing the opposite result.

The financial markets that have been in a corrective mode have lowered their expectations for the employment report following the PMIs and speeches from Fed officials, most noticeably the Chairman, Jerome Powell.

Powell acknowledged that the economy may be faltering while NY Fed Chairman, John Williams, called for Central Banks to add tools that ensure that low inflation, to ensure that any restrictions on the bank’s ability to manoeuvre are avoided. Williams also acknowledged that a lower neutral rate, the rate at which the Fed Funds rate is neither supportive to nor restricting growth, is likely to be low for some time to come.

Median expectations for the employment headline have been lowered to around +165k new jobs with hourly earnings likely to be topping out around 3.2%

The dollar remains in a corrective mode, reaching a low yesterday of 96.78 and closing at 97.02.

Sterling continues to fall versus the single currency

Given the way the dollar is currently traded in the global financial markets, with its index being used to hedge positions, the more accurate method of valuation of the pound appears to be switching to its value versus the euro.

This week, the pound has risen from a low of 1.2610 to a high of 1.2745 versus the dollar despite a significant increase in the chance of the UK leaving the EU with no deal at the end of October. This is considered the “doomsday scenario” by the market and is hardly conducive to a stronger currency. However, over the same period, Sterling has fallen from a high of 1.1332 to a low of 1.1234, a far more realistic and illustrative outcome.

Theresa May officially leaves her role as Leader of the Conservative Party and Prime Minister today although she will continue in the role as caretaker until a new leader is voted in. This process starts in earnest on Monday and there are sure to be several leading articles in the weekend newspapers in support of or decrying the chances of several candidates.

Each of the more prominent candidates has both a rallying call for the Party faithful and a plan for Brexit. These range from a commitment to leaving the EU with or without a deal by 31st of October, suspending Parliament to ensure that MPs cannot interfere any further, and even asking Brussels to delay Brexit even further. The last option is that of Michael Gove who has softened his stance on Brexit and sees himself as the “liberal” candidate.

The pound, despite the ranges mentioned above, remains in something of a “neutral” position given that it is unclear who the new Prime Minister will be. That picture may should become significantly clearer following next week’s first ballot in the Leadership battle. Yesterday, the pound closed at 1.2697 and 1.1256 versus the dollar and euro respectively.

Have a great day!

About Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”