ECB to set Euro tone
March 7th: Highlights
- Central Bank to decide stimulus?
- BoE to take a patient course
- Trade data a blow to Trump promises
ECB meeting pivotal for single currency’s short-term prospects
It is certain that the ECB will slash its growth forecast for this year and most likely next. It will confirm the long-held view that Mario Draghi, the outgoing President will leave his post in November never having presided over an economy which was growing sufficiently to warrant a hike in short term interest rates. This is despite many false-dawns over a tenure which started during the financial crisis.
Draghi will be left with his familiar role of trying to improve sentiment although he will have very little material to work with. This will end yet another false-dawn for the Eurozone economy which since its inception twenty years ago has lurched from crisis to crisis. It was only six months ago that the ECB was sufficiently comfortable to predict an end to quantitative easing and was ready to herald a new era of steady growth.
Several factors have coincided to halt growth in its tracks: the trade war and growing tension between the U.S. and China and Brexit have been the main hurdles, as well as internal political issues in many individual nations.
Yesterday, the euro traded between 1.1285 and 1.1325, closing barely changed at 1.1309.
BoE to mimic the Fed
There have been a plethora of speakers from the Monetary Policy Committee over the past few days each of whom have shown a unity of purpose which mirrors the sentiment of the Federal Reserve in the U.S.
Michel Saunders was the latest to speak today and he echoed his colleague’s words in commenting that while Brexit is a major consideration due to the continued uncertainty it creates and while inflation remains fairly well under control, combined with moderate growth, the MPC can afford to be patient.
The major dilemma facing the Central Bank is if Sterling were to “fall off a cliff”, which remains a possibility, following the end of Brexit negotiations. Were Sterling to see an adverse reaction, then inflation may rise quickly. With wage inflation unlikely to rise much more, consumer confidence would also be damaged as the price versus wages gap could narrow quickly.
Brexit negotiations apparently continue with EU negotiator Michel Barnier making cooperative noises while in practice changing nothing of the Withdrawal Agreement. This is likely to continue to be the pattern until March 12th which is the latest date for a meaningful vote on Final Agreement.
Sterling stayed in a narrow range yesterday, between 1.3180 and 1.3124, closing pretty much unchanged at 1.3172.
U.S. trade data a blow to Trump plans
The United States trade deficit ballooned to a ten year high in 2018 of $621 billion. This is a blow to the hopes of President Trump of fulfilling one of the main planks of his election campaign. That was to drive the deficit lower than his predecessor. A 6.3% rise in exports was outpaced by a 7.5% rise in imports.
Trump’s supposed protectionist agenda has been largely ignored by U.S. importers and his dealing with China by the use of tariffs has largely backfired. The U.S. had a $419 billion trade deficit with China alone last year.
Trade could become a major part of the 2020 election campaign and the President is now under pressure to deliver on his trade negotiations with China in order to salvage some credibility and improve poor approval ratings.
The ADP private employment survey which is a prelude to the NFP data, which is due be reported on Friday, showed a significant fall from January’s high. 183k new jobs were created in the private sector down from an upwardly revised 300k. This is not really a significant portent for the non-farm data but is still positive for the economy.
The dollar index reached a high of 96.99 yesterday, closing just ten pips lower.
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.”