ECB to end one stimulus, defer changes to another

Today’s final meeting of the ECB’s General Council for 2018 will confirm the end of the Asset Purchase Scheme, which has been one of the major supports for the market and was introduced in the wake of the Global Financial Crisis.

Such support has run its course in global terms but the ongoing concerns over the strength, or otherwise, of certain Eurozone banks, particularly those in Italy, have raised worries over the timing of the withdrawal.

The wider market will now be looking for any indication from ECB President Mario Draghi about when interest rates will be raised as inflation starts to tick up and savers in the region continue to suffer.

They are going to be disappointed as the ECB will certainly want to study the effect of the withdrawal of one stimulus before deciding on another. There is now a reasonable chance that rates won’t be hiked at all in 2019 meaning that Draghi won’t preside over a rate hike during his entire term on office. While this in itself will be little more than an interesting fact it does point to the difficulties he has faced during his tenure which will be best judged by future generations of economics students.

The single currency remains in the doldrums with little positive news either economically or socially to provide any optimism. It rallied yesterday reaching 1.1387 and closed at 1.1371. There won’t be any significant news from the ECB today to push it out of its recent range and it will probably now return to reactive status ahead of next week’s FOMC Meeting.

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Focus for the dollar on improving trade relations with China

Concerns over a future slowdown in U.S. growth are being glossed over for now as the market anticipates next week’s FOMC meeting at which Chairman Jerome Powell will announce a hike in short-term interest rates, the fourth such move this year.

It is, however, the release of the Fed’s economic projections and Powell’s Monetary Policy Statement that will be most eagerly anticipated. Despite the initial excitement over last week’s employment report now having dissipated, the ongoing concerns underlying the headline numbers raises concerns over the level of job creation going forward.

The two significant pieces of data, the headline increase in NFP, and wage inflation appear to have decoupled although it is hard to decipher without a few more months data. That is why there is such importance being attached to the economic projections which will give a greater indication of the Fed’s rate intentions.

The dollar has reacted positively to what appears to be a thaw in the frosty trade relationship between the U.S. and China. China made its first purchase of soya beans from the U.S. yesterday since the truce arranged between Presidents Trump and Xi was announced following the Buenos Aires G20 meeting.

Following recent positivity, the dollar index took a breather yesterday, falling to a low of 96.89 before recovering to close at 97.05.

Dollar closing the year on a high

The dollar index reached a high of 97.55 yesterday, as the greenback rallied based upon a renewed expectation that the FOMC will hike rates at its meeting next week. It is hoped that the Fed Chair, Jerome Powell, will publish an economic review that allows the Fed to continue to “normalize rates” in accordance with previous forecasts.

However, one of the primary reasons for the rally was in reaction to the continued woes being faced by the U.S.’s trading partners across the Atlantic. As the pound and euro, which make up around 70% of the index suffer the dollar has taken up the slack.

One further cause for optimism around the dollar is the progress being made in high-level trade talks between the U.S. and China. Despite the comments from President Trump that he may trade the freedom of the Huawei CFO, currently under arrest in Canada, for trade concessions which will have inflamed Beijing, a cut in the tariff attached to import of U.S cars and trucks into China is an encouraging sign.

As is normal, the effect of last week’s weaker than expected employment report has worn off and the focus is now switching to the FOMC meeting before the market closes to all intents and purposes for the holiday season.