Euro Rallies as ECB Considers Change

Hawkish ECB minute’s drive Euro higher

Having tested the strong support levels below 1.2000 in the first few days of the year, the euro yesterday returned to the path it was pursuing towards the end of 2017. The minutes of the latest ECB Council meeting were released and the showed that there is a more hawkish tone developing to the discussions about the withdrawal of additional stimulus.

There is a new discussion developing not only at the ECB, but at other G7 Central banks as well, about the timing of changes to monetary policy and whether they should be proactive or reactive. In the past, Central Banks, driven mostly by the Fed, tried to be more proactive anticipating changes in growth and/or inflation and adjusting rates accordingly. As the global economy has emerged from the global financial crisis, they have tended to become more reactive as inflation has been benign and growth patchy.

Yesterday’s minutes which showed that the ECB will need to start to consider the withdrawal sooner than had been discussed earlier returned the single currency to positive territory. It managed to break back above the pivotal 1.1980 level versus the dollar reaching a high of 1.2060 before closing at 1.2030. The gains have continued overnight with a new weeks’ high of 1.2067 being seen.

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Farage re-enters Brexit Debate

Nigel Farage the former Leader of UKIP re-entered the Brexit debate yesterday commenting that he was warming to the idea of a second Brexit referendum. This was immediately dismissed by Downing Street which said that it was “simply not an option”. Farage demonstrated his abilities as the “arch self-publicist” with a move that had more to do with his ego than any sensible alternative in the debate. His went on to say that were there to be another referendum, that the Remain Campaign would be “routed for a generation” a comment that is at odds with most recent polls which reveals that, if anything, public opinion is leaning towards Remain.

The best hope of a further referendum would not be around another “in/out” vote but on the acceptance, or otherwise of the final agreement that London reaches with Brussels.

Sterling barely reacted to the news. It was on the back foot versus a surging Euro, falling to a low of 1.1221 before closing at 1.1250. Versus the dollar, it had a more turbulent day, falling from an opening at 1.3512 to 1.3458 before recovering to close higher at 1.3535.

Data released yesterday showed that the UK total trade deficit widened between October and November last year, “due primarily to an increase in goods imports of fuels from non-EU countries”.

Dollar suffers as producer prices fall

The cost of goods at the factory gate in the U.S. fell in December pulling the rug from the dollar’s recent strength. Producer prices which show the cost of raw materials entering U.S. factories and are a useful indicator of future inflation fell by 0.1% versus an expectation of a 0.2% increase and a 0.3% rise in November.

The dollar is becoming far more sensitive to the outlook for U.S. inflation since the new Fed Chair is likely to be more reactive than his predecessor who was more inclined towards proactivity and advance guidance. The hawkish tone of several FOMC members, in speeches so far this year, will be tempered by the data.

The dollar index fell to a low of 91.79 and the decline has continued overnight with the index making a new low of 91.73 its lowest level since September 20th. The move has been magnified as the dollar and euro react to opposing drivers. Yesterday’s news was positive for the single currency while the dollar suffers its own headwinds.

Next week starts with a holiday in the U.S but will be dominated by inflation data in both the UK and Eurozone following today’s release of CPI in the U.S.